UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~June 30, 2018~~March 31, 2019



o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________

Commission File Number 1-13175

VALERO ENERGY CORPORATION

(Exact name of registrant as specified in its charter)



Delaware	74-1828067
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

One Valero Way

San Antonio, Texas

(Address of principal executive offices)

78249

(Zip Code)

(210) 345-2000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ Accelerated filer o Non-accelerated filer o

Smaller reporting company o Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

Securities registered pursuant to Section12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock	VLO	New York Stock Exchange

The number of shares of the registrant’s only class of common stock, $0.01 par value, outstanding as of ~~July 31, 2018~~April 30, 2019 was ~~427,398,027.~~417,241,451.

VALERO ENERGY CORPORATION

TABLE OF CONTENTS




	Page
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018	1
Consolidated Statements of Income for the Three ~~and Six~~ Months Ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~	2
Consolidated Statements of Comprehensive Income for the Three ~~and Six~~ Months Ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~	3
Consolidated Statements of ~~Cash Flows~~ Equity for the ~~Six~~Three Months Ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~	4
~~Condensed Notes to~~ Consolidated ~~Financial~~ Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018	5
Condensed Notes to Consolidated Financial Statements	6
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	3440
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	62
ITEM 4. CONTROLS AND PROCEDURES	64
~~ITEM 4. CONTROLS AND PROCEDURES~~	66
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS	6764
ITEM 1A. RISK FACTORS	6865
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	6865
ITEM 6. EXHIBITS	6966
SIGNATURE	7067

Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

VALERO ENERGY CORPORATION

CONSOLIDATED BALANCE SHEETS

(millions of dollars, except par value)


	June 30, 2018			December 31, 2017			March 31, 2019			December 31, 2018
	(unaudited)						(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	4,451		$	5,850		$	2,777		$	2,982
Receivables, net	7,535			6,922			8,289			7,345
Inventories	6,420			6,384			6,554			6,532
Prepaid expenses and other	542			156			860			816
Total current assets	18,948			19,312			18,480			17,675
Property, plant, and equipment, at cost	41,266			40,010			42,388			42,473
Accumulated depreciation	(13,086		)	(12,530		)	(13,980		)	(13,625		)
Property, plant, and equipment, net	28,180			27,480			28,408			28,848
Deferred charges and other assets, net	3,550			3,366			5,207			3,632
Total assets	$	50,678		$	50,158		$	52,095		$	50,155
LIABILITIES AND EQUITY
Current liabilities:
Current portion of debt and capital lease obligations	$	183		$	122
Current portion of debt and finance lease obligations							$	1,110		$	238
Accounts payable	8,963			8,348			10,005			8,594
Accrued expenses	641			712			772			630
Taxes other than income taxes payable	1,334			1,321			961			1,213
Income taxes payable	220			568			65			49
Total current liabilities	11,341			11,071			12,913			10,724
Debt and capital lease obligations, less current portion	8,876			8,750
Debt and finance lease obligations, less current portion							9,006			8,871
Deferred income tax liabilities	4,760			4,708			4,867			4,962
Other long-term liabilities	2,897			2,729			3,530			2,867
Commitments and contingencies
Equity:
Valero Energy Corporation stockholders’ equity:
Common stock, $0.01 par value; 1,200,000,000 shares authorized; 673,501,593 and 673,501,593 shares issued	7			7			7			7
Additional paid-in capital	7,032			7,039			6,802			7,048
Treasury stock, at cost; 245,078,683 and 239,603,534 common shares	(13,923		)	(13,315		)
Treasury stock, at cost; 256,273,720 and 255,905,051 common shares							(14,958		)	(14,925		)
Retained earnings	29,915			29,200			30,810			31,044
Accumulated other comprehensive loss	(1,262		)	(940		)	(1,352		)	(1,507		)
Total Valero Energy Corporation stockholders’ equity	21,769			21,991			21,309			21,667
Noncontrolling interests	1,035			909			470			1,064
Total equity	22,804			22,900			21,779			22,731
Total liabilities and equity	$	50,678		$	50,158		$	52,095		$	50,155

See Condensed Notes to Consolidated Financial Statements.

Table of Contents

VALERO ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(millions of dollars, except per share amounts)

(unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended March 31,
	2018			2017			2018			2017			2019			2018
Revenues (a)	$	31,015		$	22,254		$	57,454		$	44,026		$	24,263		$	26,439
Cost of sales:
Cost of materials and other	27,860			19,609			51,616			39,037			21,978			23,756
Operating expenses (excluding depreciation and amortization expense reflected below)	1,110			1,111			2,246			2,235			1,215			1,136
Depreciation and amortization expense	510			485			995			973			537			485
Total cost of sales	29,480			21,205			54,857			42,245			23,730			25,377
Other operating expenses	21			—			31			—			2			10
General and administrative expenses (excluding depreciation and amortization expense reflected below)	248			175			486			367			209			238
Depreciation and amortization expense	13			14			26			26			14			13
Operating income	1,253			860			2,054			1,388			308			801
Other income (expense), net	(5		)	27			46			53
Other income, net													22			51
Interest and debt expense, net of capitalized interest	(124		)	(119		)	(245		)	(240		)	(112		)	(121		)
Income before income tax expense	1,124			768			1,855			1,201			218			731
Income tax expense	249			196			398			308			51			149
Net income	875			572			1,457			893			167			582
Less: Net income attributable to noncontrolling interests	30			24			143			40			26			113
Net income attributable to Valero Energy Corporation stockholders	$	845		$	548		$	1,314		$	853		$	141		$	469

Earnings per common share	$	1.96		$	1.23		$	3.05		$	1.90		$	0.34		$	1.09
Weighted-average common shares outstanding (in millions)	429			444			430			446			416			431

Earnings per common share – assuming dilution	$	1.96		$	1.23		$	3.04		$	1.90		$	0.34		$	1.09
Weighted-average common shares outstanding – assuming dilution (in millions)	431			446			432			448			418			432
Dividends per common share	$	0.80		$	0.70		$	1.60		$	1.40
_______________________________________________
Supplemental information:
(a) Includes excise taxes on sales by certain of our international operations	$	1,470		$	1,384		$	2,934		$	2,656		$	1,330		$	1,464

See Condensed Notes to Consolidated Financial Statements.

Table of Contents

VALERO ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(millions of dollars)

(unaudited)


	Three Months Ended June 30,					Six Months Ended June 30,					Three Months Ended March 31,
	2018			2017		2018			2017		2019		2018
Net income	$	875		$	572	$	1,457		$	893	$	167	$	582
Other comprehensive income (loss):
Other comprehensive income:
Foreign currency translation adjustment	(291		)	208		(246		)	282		155		45
Net gain on pension and other postretirement benefits	9			4		17			7		3		8
Other comprehensive income (loss) before income tax expense	(282		)	212		(229		)	289
Income tax expense related to items of other comprehensive income (loss)	2			1		4			2
Other comprehensive income (loss)	(284		)	211		(233		)	287
Other comprehensive income before income tax expense											158		53
Income tax expense related to items of other comprehensive income											1		2
Other comprehensive income											157		51
Comprehensive income	591			783		1,224			1,180		324		633
Less: Comprehensive income attributable to noncontrolling interests	25			24		141			40		28		116
Comprehensive income attributable to Valero Energy Corporation stockholders	$	566		$	759	$	1,083		$	1,140	$	296	$	517

See Condensed Notes to Consolidated Financial Statements.

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VALERO ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF EQUITY

(millions of dollars)

(unaudited)



	Valero Energy Corporation Stockholders’ Equity
	Common Stock		Additional Paid-in Capital			Treasury Stock			Retained Earnings			Accumulated Other Comprehensive Loss			Total			Non- controlling Interests			Total Equity
Balance as of December 31, 2018	$	7	$	7,048		$	(14,925	)	$	31,044		$	(1,507	)	$	21,667		$	1,064		$	22,731
Net income	—		—			—			141			—			141			26			167
Dividends on common stock ($0.90 per share)	—		—			—			(375		)	—			(375		)	—			(375		)
Stock-based compensation expense	—		10			—			—			—			10			—			10
Transactions in connection with stock-based compensation plans	—		(2		)	1			—			—			(1		)	—			(1		)
Stock purchases under purchase program	—		—			(34		)	—			—			(34		)	—			(34		)
Acquisition of Valero Energy Partners LP publicly held common units	—		(328		)	—			—			—			(328		)	(622		)	(950		)
Other	—		74			—			—			—			74			—			74
Other comprehensive income	—		—			—			—			155			155			2			157
Balance as of March 31, 2019	$	7	$	6,802		$	(14,958	)	$	30,810		$	(1,352	)	$	21,309		$	470		$	21,779

Balance as of December 31, 2017	$	7	$	7,039		$	(13,315	)	$	29,200		$	(940	)	$	21,991		$	909		$	22,900
Reclassification of stranded income tax effects of Tax Reform	—		—			—			91			(91		)	—			—			—
Net income	—		—			—			469			—			469			113			582
Dividends on common stock ($0.80 per share)	—		—			—			(345		)	—			(345		)	—			(345		)
Stock-based compensation expense	—		14			—			—			—			14			—			14
Transactions in connection with stock-based compensation plans	—		(24		)	(17		)	—			—			(41		)	—			(41		)
Stock purchases under purchase program	—		—			(256		)	—			—			(256		)	—			(256		)
Contribution from noncontrolling interests	—		—			—			—			—			—			30			30
Distributions to noncontrolling interests	—		—			—			—			—			—			(11		)	(11		)
Other	—		(3		)	—			—			—			(3		)	4			1
Other comprehensive income	—		—			—			—			48			48			3			51
Balance as of March 31, 2018	$	7	$	7,026		$	(13,588	)	$	29,415		$	(983	)	$	21,877		$	1,048		$	22,925

See Condensed Notes to Consolidated Financial Statements.

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VALERO ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(millions of dollars)

(unaudited)


	Six Months Ended June 30,						Three Months Ended March 31,
	2018			2017			2019			2018
Cash flows from operating activities:
Net income	$	1,457		$	893		$	167		$	582
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense	1,021			999			551			498
Deferred income tax expense (benefit)	(24		)	24			(22		)	2
Changes in current assets and current liabilities	(445		)	859			130			(1,026		)
Changes in deferred charges and credits and other operating activities, net	188			10			51			82
Net cash provided by operating activities	2,197			2,785			877			138
Cash flows from investing activities:
Capital expenditures	(740		)	(572		)	(444		)	(356		)
Deferred turnaround and catalyst costs	(490		)	(308		)	(219		)	(220		)
Investments in joint ventures	(119		)	(222		)	(63		)	(55		)
Capital expenditures of certain variable interest entities	(78		)	—
Peru Acquisition, net of cash acquired	(471		)	—
Capital expenditures of certain variable interest entities (VIEs)							(19		)	(28		)
Acquisitions of undivided interests	(145		)	(72		)	(1		)	(85		)
Minor acquisitions	(91		)	—
Other investing activities, net	2			—			(1		)	(8		)
Net cash used in investing activities	(2,132		)	(1,174		)	(747		)	(752		)
Cash flows from financing activities:
Proceeds from debt issuances and borrowings	1,314			—
Repayments of debt and capital lease obligations	(1,345		)	(11		)
Purchase of common stock for treasury	(647		)	(660		)
Proceeds from debt issuances and borrowings (excluding borrowings of certain VIEs)							1,892			498
Proceeds from borrowings of certain VIEs							23			—
Repayments of debt and finance lease obligations							(907		)	(415		)
Purchases of common stock for treasury							(36		)	(320		)
Common stock dividends	(690		)	(627		)	(375		)	(345		)
Proceeds from issuance of Valero Energy Partners LP common units	—			36
Contribution from noncontrolling interest	32			—
Acquisition of Valero Energy Partners LP publicly held common units							(950		)	—
Contributions from noncontrolling interests							—			32
Distributions to noncontrolling interests	(50		)	(45		)	—			(11		)
Other financing activities, net	(16		)	(21		)	(25		)	(12		)
Net cash used in financing activities	(1,402		)	(1,328		)	(378		)	(573		)
Effect of foreign exchange rate changes on cash	(62		)	108			43			(5		)
Net increase (decrease) in cash and cash equivalents	(1,399		)	391
Net decrease in cash and cash equivalents							(205		)	(1,192		)
Cash and cash equivalents at beginning of period	5,850			4,816			2,982			5,850
Cash and cash equivalents at end of period	$	4,451		$	5,207		$	2,777		$	4,658

See Condensed Notes to Consolidated Financial Statements.

Table of Contents

VALERO ENERGY CORPORATION

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.	BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

General

AsThe terms “Valero,” “we,” “our,” and “us,” 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. Operating results for the ~~six~~three months ended ~~June 30, 2018~~March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2018.~~2019.

The balance sheet as of December 31, ~~2017~~2018 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, ~~2017~~.2018.

Reclassifications

~~Certain~~Effective January 1, 2019, we revised our reportable segments to reflect a new reportable segment — renewable diesel. The renewable diesel segment includes the operations of Diamond Green Diesel Holdings LLC (DGD), our consolidated joint venture as discussed in Note 8, which were transferred from the refining segment. Also effective January 1, 2019, we no longer have a VLP segment, and we now include the operations of Valero Energy Partners LP and its consolidated subsidiaries (VLP) in our refining segment. Our prior period ~~amounts have~~segment information has been ~~reclassified~~retrospectively adjusted to ~~conform to the 2018~~reflect our current segment presentation. See Note 2 regarding our merger with VLP, which occurred on January 10, 2019, and Note 11 for segment information.

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.

~~Revenue Recognition~~Leases

Background

We adopted the provisions of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic ~~606, “Revenue from Contracts with Customers,~~842, “Leases,” (Topic ~~606)~~842) on January 1, ~~2018,~~2019, as described below in “Accounting Pronouncements Adopted on January 1, ~~2018.~~2019.” Accordingly, our ~~revenue recognition~~lease accounting policy has been revised to reflect the adoption of this standard.

~~Revised Policy~~

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

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VALERO ENERGY CORPORATION

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

~~The customer~~Revised Policy

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

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

The transaction price is the consideration that we expect to be entitled to in exchange for our products. The transaction price for substantially all of our contracts is generally based on commodity market pricing (i.e., variable consideration). As such, this market pricing may be constrained (i.e., not estimable) at the inception of the contract. If we determine that a contract ~~but will be recognized~~is or contains a lease, we recognize a right-of-use (ROU) asset and lease liability at the commencement date of the lease based on the ~~applicable market pricing, which will be known upon transfer~~present value of lease payments over the lease term. The present value of the ~~goods~~lease payments is determined by using the implicit rate when readily determinable, or if not, our incremental borrowing rate for a term similar to the ~~customer. Some~~duration of ~~our~~the lease based on information available at the commencement date. Lease terms include options to extend or terminate the lease when it is reasonably certain that we will exercise those options.

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

Expense for an operating lease is recognized as a single lease cost on a straight-line basis over the lease term and reflected in the appropriate income statement line item based on the leased asset’s function. Amortization expense of ~~sales incentives to our customers, such as discounts~~a finance lease ROU asset is recognized on a straight-line basis over the lease term and ~~rebates. For contracts that include variable consideration, we estimate~~reflected in “depreciation and amortization expense,” and interest expense is incurred based on the ~~factors that determine the variable consideration in order to establish the transaction price.~~

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

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

Accounting Pronouncements Adopted on January1, ~~2018~~2019

Topic ~~606~~842

As previously noted, we adopted the provisions of Topic~~606~~ 842 on January 1, ~~2018.~~2019. Topic 606 clarifies the principles for recognizing revenue and supersedes previous revenue recognition requirements under “Revenue Recognition (Topic 605),” using the modified retrospective method of adoption as permitted by the standard. Under this method, the cumulative effect of initially applying the standard is recognized as an adjustment to the opening balance of retained earnings, and revenues reported in the periods prior to the date of adoption are not changed.We elected to apply the transition guidance for Topic 606 only to contracts that were not completed as of the date of adoption. There was no material impact to our financial position as a result of adopting Topic 606; therefore, there was no cumulative-effect adjustment to retained earnings as of January~~1, 2018. Additionally, there was no material impact to our financial position or results of operations as of and for the three and~~ ~~six~~ ~~months ended June 30, 2018. See “Revenue Recognition” above for a discussion of our accounting policy affected by our adoption of Topic 606. Also see Note 11 for further information on~~

~~Table of Contents~~

~~VALERO ENERGY CORPORATION~~

~~CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~our revenues. We implemented new processes in order to monitor ongoing compliance with accounting and disclosure requirements.~~

~~ASU No. 2016-01~~

In January 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-01, “Financial Instruments—Overall (Subtopic 825-10),” (ASU No. 2016-01) to enhance the reporting model for financial instruments regarding certain aspects of recognition, measurement, presentation, and disclosure. Effective January1, 2018, we adopted the provisions of ASU No. 2016-01 using the cumulative-effect method of adoption as required by the ASU. The adoption of this ASU did not affect our financial position or our results of operations as of or for the three and ~~six~~ months ended June 30, 2018, but it resulted in reduced disclosures as it eliminated the requirement to disclose the methods and significant assumptions used to estimate the fair value of financial instruments.

~~ASU No. 2017-07~~

In March 2017, the FASB issued ASU No. 2017-07, “Compensation—Retirement Benefits (Topic 715),” (ASU No. 2017-07) which requires employers to report the service cost component of net periodic pension cost and net periodic postretirement benefit cost in the same line item as other compensation costs arising from services rendered by the pertinent employees during the period. It also requires the other components of net periodic pension cost and net periodic postretirement benefit cost (non-service cost components) to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. Effective January 1, 2018, we retrospectively adopted the provisions of ASU No. 2017-07. The adoption of this ASU did not affect our financial position or results of operations, but did result in the reclassification of non-service cost components from operating expenses (excluding depreciation and amortization expense) and general and administrative expenses (excluding depreciation and amortization expense) to other income (expense), net. This resulted in an increase of $14 million and $21 million in operating expenses (excluding depreciation and amortization expense) and a decrease of $3 million and $1 million in general and administrative expenses (excluding depreciation and amortization expense) for the three and six months ended June 30, 2017, respectively.

~~ASU No. 2017-09~~

In May 2017, the FASB issued ASU No. 2017-09, “Compensation—Stock Compensation (Topic 718),” (ASU No. 2017-09) to reduce diversity in practice, as well as reduce cost and complexity regarding a change to the terms or conditions of a share-based payment award. Effective January 1, 2018, we adopted ASU No. 2017-09. The adoption of this ASU did not have an immediate effect on our financial position or results of operations as it is applied prospectively to an award modified on or after adoption.

~~ASU No. 2018-02~~

In February 2018, the FASB issued ASU No. 2018-02, “Income Statement—Reporting Comprehensive Income (Topic 220),” (ASU No. 2018-02) which allows for the stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 (Tax Reform) to be reclassified from accumulated other comprehensive income to retained earnings. The provisions of ASU No. 2018-02 are effective for annual reporting periods beginning after December15, 2018, and interim reporting periods within those annual periods, with early adoption permitted. This ASU shall be applied either at the beginning of the annual or interim period of adoption or retrospectively to each period in which the income tax effects of Tax Reform affects the items remaining in accumulated other comprehensive income. We elected to reclassify the stranded income tax effects of Tax Reform from accumulated other comprehensive loss to retained earnings as of the beginning of the interim

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period of adoption. Effective January 1, 2018, we adopted ASU No. 2018-02 and such adoption did not affect our financial position or results of operations but resulted in the reclassification of $91 million of income tax benefits related to Tax Reform from accumulated other comprehensive loss to retained earnings as presented in Note 6 under ~~“Accumulated Other Comprehensive Loss.”~~ ~~We release stranded income tax effects from accumulated other comprehensive loss to retained earnings on an individual item basis as those items are reclassified into income.~~

~~ASU No. 2018-05~~

In March 2018, the FASB issued ASU No. 2018-05, “Income Taxes (Topic 740)—Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118,” (ASU No. 2018-05) which amends certain Securities and Exchange Commission (SEC) material in Topic 740 for the income tax accounting implications of the recently issued Tax Reform. This guidance clarifies the application of Topic 740 in situations where a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting under Topic 740 for certain income tax effects of Tax Reform for the reporting period in which Tax Reform was enacted. See Note 9 for a discussion of the impact of this ASU.

~~Accounting Pronouncements Not Yet Adopted~~

~~Topic~~ 842

~~In February 2016, the FASB issued “Leases (Topic 842),” (Topic 842) to increase~~ increases the transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ~~This 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.~~Topic 842 supersedes previous lease accounting requirements under FASB ASC Topic 840, “Leases,” (Topic 840). We ~~will adopt this new standard on January 1, 2019, and we expect to use~~adopted Topic 842 using the optional transition method ~~which allows~~that permits us to ~~recognize~~apply the new disclosure requirements beginning in 2019 and continue to present comparative period information as required under Topic 840; however, we did not have a cumulative-effect adjustment to the opening balance of retained earnings at the date of adoption. ~~We are enhancing~~

In addition, we elected the transition practical expedient package that permits us to not reassess our prior conclusions about lease identification, lease classification, and initial direct costs under the new standard, as well as the practical expedient that permits us to not assess existing land easements under the new standard. See “Leases” above for a discussion of our accounting policy affected by our adoption of Topic 842. Also see Note 4 for information on our leases.

In preparation for the adoption of Topic 842, we enhanced our contracting and lease evaluation systems and related processes, and we ~~are developing~~developed a new lease accounting system to capture our leases and support the required disclosures. ~~During 2018, we will continue to monitor the adoption process to ensure compliance with accounting and disclosure requirements.~~ We ~~also continue the integration of~~integrated our lease accounting system with our general ledger and ~~we will make modifications to the~~modified our related procurement and payment processes. ~~We anticipate~~

Adoption of this standard ~~will have a material impact on our financial position by increasing our assets and liabilities by equal amounts through~~resulted in (i) the recognition of ~~right-of-use~~ROU assets and lease liabilities for our operating ~~leases. However, we do not expect adoption~~leases of $1.3 billion, (ii) the derecognition of existing assets under construction of $539 million related to ~~have~~ a ~~material impact on our results of operations or liquidity. We expect our accounting for capital leases~~build-to-suit lease arrangement with respect to ~~remain substantially unchanged.~~the MVP Terminal (see Note 6 under “Commitments—MVP

~~ASU No. 2017-12~~

In August 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging (Topic 815),” (ASU No. 2017-12) to improve and simplify accounting guidance for hedge accounting. The provisions of this ASU are effective for annual reporting periods beginning after December 15, 2018, and interim reporting periods within those annual periods, with early adoption permitted. We use economic hedges to manage commodity price risk; however, we have not designated these hedges as fair value or cash flow hedges. As a result, the adoption of ASU No. 2017-12 effective January 1, 2019 is not expected to affect our financial position or results of operations.

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Terminal”), and (iii) the presentation of new disclosures about our leasing activities beginning in the first quarter of 2019. Adoption of this standard did not impact our results of operations or liquidity, and our accounting for finance leases is substantially unchanged.

Other

In addition to the adoption of Topic 842 discussed above, we adopted the following Accounting Standards Update (ASU) during the three months ended March 31, 2019. Our adoption of this ASU did not affect our financial statements or related disclosures.



ASU		Adoption Date	Basis of Adoption
2017-12	Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities	January1, 2019	Cumulative effect

Accounting Pronouncements Not Yet Adopted

The following ASUs have not yet been adopted and are not expected to have a material impact on our financial statements or related disclosures.



ASU		Expected Adoption Date	Basis of Adoption
2016-13	Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments	January1, 2020	Cumulative effect
2018-17	Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities	January1, 2020	Cumulative effect


2.	~~ACQUISITION~~MERGER WITH VLP

~~Peru Acquisition~~

On ~~May 14, 2018,~~January 10, 2019, we ~~acquired 100 percent~~completed our acquisition of all of the ~~issued~~outstanding publicly held common units of VLP pursuant to a definitive Agreement and Plan of Merger (Merger Agreement, and together with the transactions contemplated thereby, the Merger Transaction) with VLP. Upon completion of the Merger Transaction, each outstanding ~~equity interests~~publicly held common unit was converted into the right to receive $42.25 per common unit in ~~Pure Biofuels del Peru S.A.C. (Pure Biofuels) from Pegasus Capital Advisors L.P.~~cash without any interest thereon, and ~~various minority equity holders (collectively,~~all such publicly traded common units were automatically canceled and ceased to exist. Upon completion of the ~~sellers). Pure Biofuels markets refined petroleum products through a network~~Merger Transaction, we paid aggregate merger consideration of ~~logistics assets throughout Peru. Pure Biofuels owns a terminal at the Port of Callao, near Lima,~~$950 million, which was funded with approximately 1 million barrels of storage capacity for refined petroleum and renewable products. Through one of its subsidiaries, Pure Biofuels also owns a 180,000-barrel storage terminal in Paita, in northern Peru, which is scheduled to commence operations later in 2018. We paid $471 million from available cash on ~~hand, of which $122 million was for working capital. The amount paid for working capital is subject~~hand.

Prior to adjustment pending the final working capital settlement that is expected to be completed in the third quarter of 2018. This acquisition, which is referred to as the Peru Acquisition, is consistent with our general business strategy and broadens the geographic diversity of our refining and marketing network.

~~The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date, which are preliminary and subject to change after~~ the completion of ~~an independent appraisal~~the Merger Transaction, we consolidated the financial statements of VLP (see Note 8) and ~~other evaluations (in millions).~~

Current assets, net of cash acquired $ 147
Property, plant, and equipment 137
Deferred charges and other assets 451
Current liabilities, excluding current portion of debt (25 )
Debt assumed, including current portion (137 )
Deferred income tax liabilities (81 )
Other long-term liabilities (21 )
Total consideration, net of cash acquired $ 471

~~Deferred charges and other assets primarily include identifiable intangible assets~~reflected noncontrolling interests on our balance sheet for the portion of $210 million and goodwill of $228 million. Identifiable intangible assets, which consist of customer contracts and relationships, are expected to be amortized on a straight-line basis over ten years. Goodwill is calculated as the excessVLP’s partners’ capital held by VLP’s public common unitholders. Upon completion of the ~~consideration transferred over~~Merger Transaction, VLP became our indirect wholly owned subsidiary and, as a result, we no longer reflect noncontrolling interests on our balance sheet with respect to VLP. In addition, we no longer attribute a portion of VLP’s net income to noncontrolling interests. Because we had a controlling financial interest in VLP before the ~~estimated fair values~~Merger Transaction and retained our controlling financial interest in VLP after the Merger Transaction, the change in our ownership interest in VLP as a result of the underlying tangible and identifiable intangible assets acquired and liabilities assumed. Goodwill represents the future economic benefits expected to be recognized from our expansion into the South American refined petroleum products market arising from other assets acquired that were not individually identified and separately recognized. We determined that the entire balance of goodwill is related to the refining segment. None of the goodwill is expected to be deductiblemerger was accounted for ~~tax purposes.~~

The Peru Acquisition purchase agreement provides for a potential earn-out payment based on Pure Biofuels’ earnings for the period from January 1, 2021 through December 31, 2021, or if certain events occur, for the period from January 1, 2020 through December 31, 2020. The sellers are entitled to receive the contingent earn-out payments if certain financial metrics are achieved by Pure Biofuels. As of June 30, 2018,as an equity transaction. Accordingly, we did not ~~record~~recognize a ~~contingent liability with respect to this earn-out agreement based~~gain or loss on ~~our preliminary estimate of its fair value.~~the Merger Transaction.

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~~Other Disclosures~~

Our consolidated statements of income include the results of operations of Pure Biofuels since the date of acquisition, and such results are reflected in the refining segment. Results of operations since the date of acquisition, supplemental pro forma financial information, and acquisition-related costs have not been presented for the Peru Acquisition as such information is not material to our results of operations.


3.	INVENTORIES

Inventories consisted of the following (in millions):



	March 31, 2019		December 31, 2018
Refinery feedstocks	$	2,338	$	2,265
Refined petroleum products and blendstocks	3,572		3,653
Ethanol feedstocks and products	328		298
Renewable diesel feedstocks and products	50		52
Materials and supplies	266		264
Inventories	$	6,554	$	6,532

June 30,
2018
December 31,
2017
Refinery feedstocks $ 2,213
$ 2,427
Refined petroleum products and blendstocks 3,717
3,459
Ethanol feedstocks and products 231
242
Materials and supplies 259
256
Inventories $ 6,420
$ 6,384

As of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, the replacement cost (market value) of ~~LIFO~~last-in, first-out (LIFO) inventories exceeded their LIFO carrying amounts by ~~$3.9~~$3.5 billion and ~~$3.0~~$1.5 billion, ~~respectively, and our~~respectively. Our non-LIFO inventories accounted for $1.1 billion ~~and $1.0 billion, respectively,~~ of our total ~~inventories.~~inventories as of March 31, 2019 and December 31, 2018.


4.	~~DEBT AND CAPITAL LEASE OBLIGATIONS~~LEASES

~~Debt~~

~~During the six months ended June 30, 2018, the following activity occurred:~~

General

We issued in a public offering $750 million aggregate principal amount of our 4.35 percent Senior Notes due June 1, 2028. Gross proceeds from this debt issuance were $749 million before deducting the underwriting discount and other debt issuance costs totaling $7 million. The proceeds were used to redeem our 9.375 percent Senior Notes due March 15, 2019 (9.375 percent Senior Notes) for $787 million, which includes an early redemption fee of $37 million that was charged to other income (expense), net.

VLP issued in a public offering $500 million aggregate principal amount of its 4.5 percent Senior Notes due March 15, 2028. Gross proceeds from this debt issuance were $498 million before deducting the underwriting discount and other debt issuance costs totaling $5 million. The proceeds are available only to the operations of VLP and were used to repay the outstanding balance of $410 million on VLP’s $750 million senior unsecured revolving credit facility (the VLP Revolver) and $85 million of its notes payable to us, which is eliminated in consolidation.

~~Central Mexico Terminals, which is the name used by us to refer to one of our consolidated variable interest entities (VIEs) and which is further described and defined in Note 7,~~have entered into long-term leasing arrangements for the right to use various classes of underlying assets as follows:


•	Pipelines, Terminals, and Tanks includes facilities and equipment used in the storage, transportation, production, and sale of refinery feedstock, refined petroleum product, and corn inventories;


•	Marine Transportation includes time charters for ocean-going tankers and coastal vessels;


•	Rail Transportation includes railcars and related storage facilities;


•	Feedstock Processing Equipment includes machinery, equipment, and various facilities used in our refining, ethanol, and renewable diesel operations;


•	Energy and Gases includes facilities and equipment related to industrial gases and power used in our operations; and


•	Real Estate includes land and rights-of-way associated with our refineries and pipelines, as well as office facilities.

In addition to fixed lease payments, some arrangements contain provisions for variable lease payments. Certain leases for pipelines, terminals, and tanks provide for variable lease payments based on, among other things, throughput volumes in excess of a ~~combined $340 million unsecured revolving credit facility (IEnova Revolver) with IEnova (defined~~base amount. Certain marine transportation leases contain provisions for payments that are contingent on usage. Additionally, if the rental increases are not scheduled in ~~Note 7). Central Mexico Terminals borrowed $56 million and had no repayments under~~ the ~~IEnova Revolver.~~lease, such as an increase based on subsequent changes in the index or rate, those rents are considered variable lease payments. In all instances, variable lease payments are recognized in the period in which the obligation for those payments is incurred.

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Lease Costs and Other Supplemental Information

In accordance with Topic 842, our total lease cost comprises costs that are included in our income statement, as well as costs capitalized as part of an item of property, plant, and equipment or inventory. Total lease cost by class of underlying asset was as follows for the three months ended March 31, 2019 (in millions):



	Pipelines, Terminals, and Tanks		Transportation					Feedstock Processing Equipment		Energy and Gases		Real Estate			Total
	Pipelines, Terminals, and Tanks		Marine			Rail		Feedstock Processing Equipment		Energy and Gases		Real Estate			Total
Finance lease cost:
Amortization of ROU assets	$	8	$	—		$	—	$	1	$	1	$	—		$	10
Interest on lease liabilities	10		—			—		—		1		—			11
Operating lease cost	47		34			11		7		2		4			105
Variable lease cost	18		10			—		—		—		—			28
Short-term lease cost	3		14			—		6		—		—			23
Sublease income	—		(1		)	—		—		—		(1		)	(2		)
Total lease cost	$	86	$	57		$	11	$	14	$	4	$	3		$	175

In accordance with Topic 840, “rental expense, net of sublease rental income” was as follows for the three months ended March 31, 2018 (in millions):



Minimum rental expense	$	129
Contingent rental expense	6
Total rental expense	135
Less sublease rental income	10
Rental expense, net of sublease rental income	$	125

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The ~~IEnova Revolver matures~~following table presents additional information related to our operating and finance leases as of March 31, 2019 (in millions, except for lease terms and discount rates):



	March 31, 2019
	Operating Leases			Finance Leases
Supplemental balance sheet information:
ROU assets, net reflected in the following balance sheet line items:
Property, plant, and equipment, net	$	—		$	597
Deferred charges and other assets, net	1,303			—
Total ROU assets, net	$	1,303		$	597

Current lease liabilities reflected in the following balance sheet line items:
Current portion of debt and finance lease obligations	$	—		$	25
Accrued expenses	304			—
Noncurrent lease liabilities reflected in the following balance sheet line items:
Debt and finance lease obligations, less current portion	—			581
Other long-term liabilities	956			—
Total lease liabilities	$	1,260		$	606

Other supplemental information:
Weighted-average remaining lease term	8.3 years			23.3 years
Weighted-average discount rate	5.1		%	5.5		%

Supplemental cash flow information related to our operating and finance leases is presented in Note 12.

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Maturity Analysis

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



	March 31, 2019				December 31, 2018
	Operating Leases		Finance Leases		Operating Leases		Capital Leases
2019 (a)	$	273	$	51	$	359	$	69
2020	267		65		245		65
2021	191		63		178		62
2022	157		64		146		64
2023	131		65		123		65
Thereafter	576		939		514		957
Total undiscounted lease payments	1,595		1,247		$	1,565	1,282
Less amount associated with discounting	335		641				676
Total lease liabilities	$	1,260	$	606			$	606

____________________


(a)	The amounts as of March 31, 2019 are for the remaining nine months of 2019.

Future Lease Commencement

As described and defined in Note 6, we have a terminaling agreement with MVP to utilize the MVP Terminal upon completion of phase two, which is expected to occur in late 2019. We expect to recognize an ROU asset and lease liability of approximately $1.1 billion in 2020 in connection with this agreement.


5.	DEBT

Public Debt

During the three months ended March 31, 2019, the following activityoccurred:

•

We issued $1 billion of 4.00 percent Senior Notes due April 1, 2029. Proceeds from this debt issuance totaled$992 million before deducting the underwriting discount and other debt issuance costs. In April 2019, the proceeds were used to redeem our 6.125 percent Senior Notes due February 1, 2020 (6.125 percent Senior Notes) for $871 million, or 102.48 percent of stated value, which includes an early redemption fee of $21 million that will be reflected in “other income, net” in our statements of income for the three and six months ended June 30, 2019.


•	In connection with the completion of the Merger Transaction as described in Note 2, Valero entered into a guarantee agreement to fully and unconditionally guarantee the prompt payment, when due, of any amount owed to the holders of VLP’s 4.375 percent Senior Notes due December 15, 2026 and 4.5 percent Senior Notes due March 15, 2028. See Note 15 for condensed consolidating financial statements.

During the three months ended March 31, 2018, VLP issued $500 million of 4.5 percent Senior Notes due March 15, 2028. ~~However, IEnova may terminate~~Proceeds from this debt issuance totaled $498 million before deducting the ~~IEnova Revolver at any time~~underwriting discount and ~~demand repayment of all outstanding amounts; therefore, such amounts are reflected in current portion of debt.~~other debt issuance costs. The ~~IEnova Revolver is~~proceeds were available only to the operations of ~~Central Mexico Terminals,~~VLP and were

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used to repay the ~~creditors~~outstanding balance of ~~Central Mexico Terminals do not have recourse against Valero.~~

~~Outstanding borrowings under~~$410 million on the ~~IEnova~~VLP Revolver bear interest at the three-month LIBO rate for the applicable interest period in effect from time to time plus the applicable margin. The interest rate under the IEnova Revolver is subject to adjustment, with agreement by both parties, based upon changes in market conditions. As of June 30, 2018, the variable rate was 5.958 percent.

~~We retired $137~~(defined below) and $85 million of ~~debt assumed~~its notes payable to us, which were eliminated in ~~connection with the Peru Acquisition with available cash on hand.~~consolidation.

~~During the six months ended June 30, 2017, we had no significant debt activity.~~Credit Facilities

Summary of Credit Facilities

We had outstanding borrowings, letters of credit issued, and availability under our credit facilities as follows (amounts in millions and currency in U.S. dollars, except as noted):



				March 31, 2019
	Facility Amount		Maturity Date	Outstanding Borrowings		Letters of Credit Issued (b)		Availability
Committed facilities:
Valero Revolver	$	4,000	March 2024	$	—	$	55	$	3,945
Canadian Revolver	C$	150	November 2019	C$	—	C$	5	C$	145
Accounts receivable sales facility	$	1,300	July 2019	$	100	n/a		$	1,200
Letter of credit facility	$	100	November 2019	n/a		$	—	$	100
Committed facilities of VIE (a):
IEnova Revolver	$	340	February 2028	$	132	n/a		$	208
Uncommitted facilities:
Letter of credit facilities	n/a		n/a	n/a		$	408	n/a

June 30, 2018
Facility
Amount Maturity Date Outstanding
Borrowings Letters of
Credit Issued Availability
Committed facilities:
Valero Revolver $ 3,000
November 2020 $ —
$ 119
$ 2,881
VLP Revolver 750
November 2020 —
—
750
IEnova Revolver 340
February 2028 56
n/a
284
Canadian Revolver C$ 75
November 2018 C$ —
C$ 6
C$ 69
Accounts receivable
sales facility (a)
1,300
July 2018 100
n/a
1,200
Letter of credit facility 100
November 2018 n/a
—
100
Uncommitted facilities:
Letter of credit facilities n/a
n/a n/a
301
n/a

~~___________________~~____________


(a)	~~In July 2018, we amended this facility to extend the maturity date from July 2018 to July 2019.~~Creditors of our VIE do not have recourse against us.


(b)	Letters of credit issued as of March 31, 2019 expire at various times in 2019 through 2020.

~~Letters~~

Valero Revolver

In March 2019, we amended our revolving credit facility (the Valero Revolver) to increase the borrowing capacity from $3 billion to $4 billion and to extend the maturity date from November 2020 to March 2024. The Valero Revolver also provides for the issuance of letters of credit ~~issued as~~ of ~~June 30, 2018 expire at various times in 2018through 2020.~~up to $2.4 billion.

VLP Revolver

As of ~~June 30,~~December 31, 2018, VLP had a $750 million senior unsecured revolving credit facility (the VLP Revolver) with a group of lenders that was scheduled to mature in November 2020. However, on January 10, 2019, in connection with the completion of the Merger Transaction as described in Note 2, the VLP Revolver was terminated.

Accounts Receivable Sales Facility

During the three months ended March 31, 2019, we sold and repaid $900 million of eligible receivables under our accounts receivable sales facility.As of March 31, 2019 and December 31, ~~2017,~~2018, the variable interest rate on the accounts receivable sales facility was ~~2.7009~~3.1774 percent and ~~2.0387~~3.0618 percent, respectively.

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

IEnova Revolver

During the three months ended March 31, 2019, Central Mexico Terminals (as described in Note 8) borrowed $23 million and had no repayments under a combined $340 million unsecured revolving credit facility (IEnova Revolver) with IEnova (defined in Note 8). As of March 31, 2019 and December 31, 2018, the variable interest rate was 6.447 percent and 6.046 percent, respectively.

Other Disclosures

“Interest and debt expense, net of capitalized ~~interest~~interest” is comprised of the following (in millions):



	Three Months Ended March 31,
	2019		2018
Interest and debt expense	$	136	$	139
Less capitalized interest	24		18
Interest and debt expense, net of capitalized interest	$	112	$	121

Three Months Ended
June 30, Six Months Ended
June 30,
2018 2017 2018 2017
Interest and debt expense $ 144
$ 134
$ 283
$ 268
Less capitalized interest 20
15
38
28
Interest and debt expense, net of
capitalized interest
$ 124
$ 119
$ 245
$ 240


5.6.	COMMITMENTS AND CONTINGENCIES

Commitments

MVP Terminal

We have a 50 percent membership interest in MVP Terminalling, LLC (MVP), a Delaware limited liability company formed in September 2017 with a subsidiary of Magellan Midstream Partners LP (Magellan), to construct, own, and operate the Magellan Valero Pasadena marine terminal (MVP Terminal) located adjacent to the Houston Ship Channel in Pasadena, Texas. Construction of phases one and two of the project began in 2017 with a total estimated cost of approximately $840 million, of which we have committed to contribute 50 percent (approximately $420 million). The project could expand up to four phases with a total project cost of approximately $1.4 billion if warranted by additional demand and agreed to by Magellan and us. Since inception, we have contributed ~~$185~~$303 million to MVP, of which ~~$104~~$56 million was contributed during the ~~six~~three months ended ~~June 30, 2018.~~March 31, 2019.

Concurrent with the formation of MVP, we entered into a terminaling agreement with MVP to utilize the MVP Terminal upon completion of phase two, which is expected to occur in ~~early 2020.~~late 2019. The terminaling agreement has an initial term of 12 years with two five-year automatic renewals, and year-to-year renewals thereafter.

~~Due~~Prior to our adoption of Topic 842 as described in Note 1, we were considered the accounting owner of the MVP Terminal during the construction period due to our membership interest in MVP and because we determined that the terminaling agreement was a capital ~~lease, we are the accounting owner of the MVP Terminal during the construction period.~~lease. Accordingly, as of ~~June 30,~~December 31, 2018, we had recorded an asset of ~~$370~~$539 million in property, plant, and equipment representing 100 percent of the construction costs incurred by MVP, as well as capitalized interest incurred by us, and a long-term liability of ~~$186~~$292 million payable to Magellan. The amounts recorded for the portion of the construction costs associated with the payable to Magellan were noncash investing and financing items, respectively.

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On January 1, 2019, as a result of our adoption of Topic 842, we derecognized the asset and liability related to MVP discussed above and recorded our equity investment in MVP of $247 million, which is included in “deferred charges and other assets, net.” The amounts derecognized are noncash investing and financing items, respectively.As of March 31, 2019, our equity investment in MVP was $303 million.

Central Texas Pipeline

We have committed to a 40 percent undivided interest in a project with a subsidiary of Magellan to jointly build an estimated ~~135-mile,~~130-mile, 20-inch refined petroleum products pipeline with a capacity of up to 150,000 barrels per day from Houston to Hearne, Texas. The pipeline is expected to be completed in ~~mid-2019.~~the third quarter of 2019. The estimated cost of our 40 percent undivided interest in this pipeline is $170 million. Since inception, ~~capital~~ expenditures have totaled ~~$49~~$81 million, of which ~~$42~~$1 million was spent during the ~~six~~three months ended ~~June 30, 2018~~March 31, 2019.

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~~VALERO ENERGY CORPORATION~~

~~CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~Sunrise Pipeline System~~

Effective January 31, 2018, we entered into a joint ownership agreement with Sunrise Pipeline LLC, a subsidiary of Plains All American Pipeline, L.P. (Plains), that provides us a 20 percent undivided interest in the Sunrise Pipeline System expansion to be constructed by Plains. The Sunrise Pipeline System is expected to contain (i) an estimated 255-mile, 24-inch crude oil pipeline (the Sunrise Pipeline) that originates at Plains’ terminal in Midland, Texas and ends at Plains’ station in Wichita Falls, Texas with throughput capacity of approximately 500,000 barrels per day, and (ii) two 270,000 shell barrel capacity tanks located at the Colorado City, Texas station. The Sunrise Pipeline System expansion is currently under construction and is expected to be placed in service in 2019. The estimated cost of our 20 percent undivided interest in the Sunrise Pipeline System is $135 million. Capital expenditures totaled $103 million for the six months ended ~~June 30, 2018~~.

~~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 environmental cleanup 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 our shutdown refinery site, which is adjacent to the Village. During the second quarter of 2018, we entered into a consent order with the Illinois EPA that we anticipate will be approved by the state court. In the consent order, we have assumed the underlying liability for full cleanup of our shutdown refinery site. As a result, we recorded an adjustment to our existing environmental liability related to this matter, which did not materially affect our financial position or results of operations as of or for the three and six months ended June 30, 2018. We continue to seek contribution under Illinois law in state court and are pursuing claims under the Comprehensive Environmental Response, Compensation and Liability Act in federal court from other potentially responsible parties. Factors underlying the expected cost of the cleanup are subject to change from time to time, and actual results may vary significantly from the current 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.

~~Texas City Refinery Fire~~

In April 2018, our Texas City Refinery experienced a fire in its alkylation unit. The costs to respond to and assess the damage caused by the fire are included in other operating expenses in the statements of income. This incident did not have a material adverse effect on our results of operations.

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~~VALERO ENERGY CORPORATION~~

~~CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~


6.7.	EQUITY

~~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):~~

Six Months Ended June 30,
2018 2017

Valero
Stockholders’
Equity

Non-
controlling
Interests (a)

Total
Equity

Valero
Stockholders’
Equity

Non-
controlling
Interests (a)

Total
Equity
Balance as of
beginning of period
$ 21,991
$ 909
$ 22,900
$ 20,024
$ 830
$ 20,854
Net income 1,314
143
1,457
853
40
893
Dividends (690 ) —
(690 ) (627 ) —
(627 )
Stock-based
compensation expense
29
—
29
25
—
25
Transactions in connection
with stock-based
compensation plans
(134 ) —
(134 ) (13 ) —
(13 )
Stock purchases under
purchase programs
(508 ) —
(508 ) (649 ) —
(649 )
Contribution from
noncontrolling interest
—
32
32
—
—
—
Distributions to
noncontrolling interests
—
(50 ) (50 ) —
(45 ) (45 )
Other (2 ) 3
1
23
17
40
Other comprehensive
income (loss)
(231 ) (2 ) (233 ) 287
—
287
Balance as of end of period $ 21,769
$ 1,035
$ 22,804
$ 19,923
$ 842
$ 20,765

~~___________________~~


~~(a)~~	~~The noncontrolling interests relate to third-party ownership interests in VIEs for which we are the primary beneficiary and therefore consolidate. See~~ ~~Note 7~~ ~~for information about our consolidated VIEs.~~

Share Activity

There was no significant share activity during the ~~six~~three months ended ~~June 30, 2018~~March 31, 2019 and ~~2017.~~2018.

Common Stock Dividends

On ~~July 20, 2018,~~April 30, 2019, our board of directors declared a quarterly cash dividend of ~~$0.80~~$0.90 per common share payable on ~~September 5, 2018~~June 4, 2019 to holders of record at the close of business on ~~August 7, 2018.~~May 15, 2019.

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~~VALERO ENERGY CORPORATION~~

~~CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

Accumulated Other Comprehensive Loss

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



	Three Months Ended March 31,
	2019									2018
	Foreign Currency Translation Adjustment			Defined Benefit Plans Items			Total			Foreign Currency Translation Adjustment			Defined Benefit Plans Items			Total
Balance as of beginning of period	$	(1,022	)	$	(485	)	$	(1,507	)	$	(507	)	$	(433	)	$	(940	)
Other comprehensive income before reclassifications	153			—			153			42			—			42
Amounts reclassified from accumulated other comprehensive loss	—			2			2			—			6			6
Other comprehensive income	153			2			155			42			6			48
Reclassification of stranded income tax effects of Tax Reform to retained earnings	—			—			—			—			(91		)	(91		)
Balance as of end of period	$	(869	)	$	(483	)	$	(1,352	)	$	(465	)	$	(518	)	$	(983	)

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VALERO ENERGY CORPORATION

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Six Months Ended June 30,
2018 2017

Foreign
Currency
Translation
Adjustment

Defined
Benefit
Plans
Items
Total
Foreign
Currency
Translation
Adjustment

Defined
Benefit
Plans
Items
Total
Balance as of beginning of period $ (507 ) $ (433 ) $ (940 ) $ (1,021 ) $ (389 ) $ (1,410 )
Other comprehensive income (loss)
before reclassifications
(244 ) —
(244 ) 282
—
282
Amounts reclassified from
accumulated other
comprehensive loss
—
13
13
—
5
5
Other comprehensive income (loss) (244 ) 13
(231 ) 282
5
287
Reclassification of stranded income
tax effects of Tax Reform
to retained earnings per
ASU 2018-02 (see Note 1)
—
(91 ) (91 ) —
—
—
Balance as of end of period $ (751 ) $ (511 ) $ (1,262 ) $ (739 ) $ (384 ) $ (1,123 )


7.8.	VARIABLE INTEREST ENTITIES

Consolidated VIEs

We consolidate a VIE when we have a variable interest in an entity for which we are the primary beneficiary. ~~Our~~As of March 31, 2019, our significant consolidated ~~VIE’s include:~~VIEs included:

VLP, a publicly traded master limited partnership formed to own, operate, develop, and acquire crude oil and refined petroleum products pipelines, terminals, and other transportation and logistics assets;

~~Diamond Green Diesel Holdings LLC (DGD),~~DGD, a joint venture ~~formed to construct~~with a subsidiary of Darling Ingredients Inc., which owns and ~~operate~~operates a biodiesel plant that processes animal fats, used cooking oils, and other vegetable oils into renewable green diesel; and

Central Mexico Terminals, ~~(previously referred to by us as VPM Terminals),~~which is a collective group of three subsidiaries of Infraestructura Energetica Nova, S.A.B. de C.V. (IEnova), a Mexican company and subsidiary of Sempra Energy, a U.S. public company. We have terminaling agreements with Central Mexico Terminals that represent variable interests. We do not have an ownership interest in Central Mexico Terminals.

The 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 some of our VIEs in support of their construction or acquisition activities, these transactions are eliminated

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~~VALERO ENERGY CORPORATION~~

~~CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

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).


	June 30, 2018										March 31, 2019
	VLP		DGD		Central Mexico Terminals		Other		Total		DGD		Central Mexico Terminals		Other		Total
Assets
Cash and cash equivalents	$	100	$	167	$	2	$	14	$	283	$	85	$	2	$	20	$	107
Other current assets	1		50		13		—		64		137		21		68		226
Property, plant, and equipment, net	1,413		529		107		119		2,168		584		140		111		835
Liabilities
Current liabilities	$	27	$	29	$	63	$	6	$	125
Debt and capital lease obligations, less current portion	989		—		—		38		1,027
Current liabilities, including current portion of debt and finance lease obligations											$	35	$	157	$	67	$	259
Debt and finance lease obligations, less current portion											1		—		34		35
Other long-term liabilities											1		38		6		45

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VALERO ENERGY CORPORATION

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2017
VLP DGD
Central
Mexico
Terminals
Other Total
Assets
Cash and cash equivalents $ 42
$ 123
$ 1
$ 13
$ 179
Other current assets 2
66
4
—
72
Property, plant, and equipment, net 1,416
435
51
127
2,029
Liabilities
Current liabilities $ 27
$ 33
$ 26
$ 9
$ 95
Debt and capital lease obligations,
less current portion
905
—
—
43
948



	December 31, 2018
	VLP (a)		DGD		Central Mexico Terminals		Other		Total
Assets
Cash and cash equivalents	$	152	$	65	$	—	$	18	$	235
Other current assets	2		112		20		64		198
Property, plant, and equipment, net	1,409		576		156		113		2,254
Liabilities
Current liabilities, including current portion of debt and finance lease obligations	$	27	$	28	$	118	$	9	$	182
Debt and finance lease obligations, less current portion	990		—		—		34		1,024
Other long-term liabilities	1		—		3		1		5

____________________

(a)

Prior to the completion of the Merger Transaction with VLP on January 10, 2019 as discussed in Note 2, VLP was a publicly traded master limited partnership that we had determined was a VIE. VLP was formed by us to own, operate, develop, and acquire crude oil and refined petroleum products pipelines, terminals, and other transportation and logistics assets. As of December 31, 2018, we owned a 66.2 percent limited partner interest and a 2.0 percent general partner interest in VLP, and public unitholders owned a 31.8 percent limited partner interest. Upon completion of the Merger Transaction, VLP became our indirect wholly owned subsidiary and, as a result, was no longer a VIE.

Non-Consolidated VIEs

We hold variable interests in VIEs that have not been consolidated because we are not considered the primary beneficiary. These non-consolidated VIEs are not material to our financial position or results of operations and are primarily accounted for as equity investments. ~~MVP is one~~One of our non-consolidated VIEs ~~and~~ is ~~accounted for under owner accounting as~~MVP, which is described in Note 5.6. As of ~~June 30, 2018,~~March 31, 2019, our maximum exposure to loss was ~~$185~~$303 million, which represents our equity investment in MVP. We have not provided any financial support to MVP other than amounts previously required by our membership interest.

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VALERO ENERGY CORPORATION

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


8.9.	EMPLOYEE BENEFIT PLANS

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



	Pension Plans						Other Postretirement Benefit Plans
	2019			2018			2019			2018
Three months ended March 31:
Service cost	$	30		$	34		$	1		$	1
Interest cost	24			23			3			2
Expected return on plan assets	(42		)	(41		)	—			—
Amortization of:
Net actuarial (gain) loss	10			16			(1		)	—
Prior service credit	(4		)	(5		)	(2		)	(3		)
Special charges	—			2			1			—
Net periodic benefit cost	$	18		$	29		$	2		$	—

Pension Plans
Other Postretirement
Benefit Plans
2018 2017 2018 2017
Three months ended June 30:
Service cost $ 33
$ 30
$ 2
$ 2
Interest cost 23
22
3
2
Expected return on plan assets (41 ) (38 ) —
—
Amortization of:
Net actuarial (gain) loss 17
14
(1 ) (1 )
Prior service credit (4 ) (5 ) (3 ) (4 )
Special charges 3
—
—
—
Net periodic benefit cost (credit) $ 31
$ 23
$ 1
$ (1 )

Six months ended June 30:
Service cost $ 67
$ 61
$ 3
$ 3
Interest cost 46
43
5
5
Expected return on plan assets (82 ) (75 ) —
—
Amortization of:
Net actuarial (gain) loss
33
27
(1 ) (2 )
Prior service credit (9 ) (10 ) (6 ) (8 )
Special charges 5
—
—
—
Net periodic benefit cost (credit)
$ 60
$ 46
$ 1
$ (2 )

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

WeAs previously disclosed in our annual report on Form 10-K for the year ended December 31, 2018, we plan to contribute approximately $35 million to our pension plans and $21 million to our other postretirement benefit plans during 2019. During the three months ended March 31, 2019 and 2018, we contributed ~~$16~~$14 million and ~~$14~~$8 million, respectively, to our pension plans and $9$4 million and ~~$13~~$4 million, respectively, to our other postretirement benefit ~~plans during the six months ended June 30, 2018 and 2017.~~plans.

Management has elected to increase the discretionary contributions to our pension plans by $10 million during the second half of 2018, resulting in expected contributions to our pension plans of approximately $141 million for 2018, which includes discretionary contributions of $110 million. Our anticipated contributions to our other postretirement benefit plans during 2018 have not changed from the amount previously disclosed in our financial statements for the year ended December 31, 2017.

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VALERO ENERGY CORPORATION

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


9.	~~INCOME TAXES~~

On December 22, 2017, Tax Reform was enacted, which resulted in significant changes to the U.S. Internal Revenue Code of 1986, as amended (the Code), and was effective beginning on January 1, 2018. Tax Reform introduced significant and complex changes to the Code, and regulatory guidance from the Internal Revenue Service (IRS) is needed in order to properly account for many of the changes. In response, the SEC issued Staff Accounting Bulletin No. 118, “Income Tax Accounting Implications of the Tax Cuts and Jobs Act,” that was codified through the issuance of ASU No. 2018-05 as described in Note 1, which requires that the effects of Tax Reform be recorded for items where the accounting is complete, as well as for items where a reasonable estimate can be made (referred to as provisional amounts). For items where reasonable estimates cannot be made, provisional amounts should not be recorded and those items should continue to be accounted for under the Code prior to changes from Tax Reform until a reasonable estimate can be made.

We recorded the effects of Tax Reform for the year ended December 31, 2017 in accordance with ASU No. 2018-05, which included provisional amounts associated with the one-time transition tax on the deemed repatriation of previously undistributed accumulated earnings and profits of our international subsidiaries. We also identified items where reasonable estimates could not be made at that time.

We did not revise our initial provisional estimate during the three and six months ended June 30, 2018, and we have not completed our accounting for the income tax effects of Tax Reform. We continue to gather additional information in order to revise our initial estimates and await regulatory guidance from the IRS. We anticipate this information and guidance will be available in the second half of 2018 and that any adjustments will be recorded at that time.

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~~VALERO ENERGY CORPORATION~~

~~CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~


10.	EARNINGS PER COMMON SHARE

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

Three Months Ended June 30,
2018 2017

Participating
Securities

Common
Stock

Participating
Securities

Common
Stock
Earnings per common share:
Net income attributable to Valero stockholders $ 845
$ 548
Less dividends paid:
Common stock 344
311
Participating securities 1
1
Undistributed earnings $ 500
$ 236
Weighted-average common shares outstanding 1
429
2
444
Earnings per common share:
Distributed earnings $ 0.80
$ 0.80
$ 0.70
$ 0.70
Undistributed earnings 1.16
1.16
0.53
0.53
Total earnings per common share $ 1.96
$ 1.96
$ 1.23
$ 1.23

Earnings per common share –
assuming dilution:

Net income attributable to Valero stockholders $ 845
$ 548
Weighted-average common shares outstanding 429
444
Common equivalent shares 2
2
Weighted-average common shares outstanding –
assuming dilution
431
446
Earnings per common share – assuming dilution $ 1.96
$ 1.23



	Three Months Ended March 31,
	2019		2018
Earnings per common share:
Net income attributable to Valero stockholders	$	141	$	469
Less income allocated to participating securities	1		1
Net income available to common stockholders	$	140	$	468

Weighted-average common shares outstanding	416		431

Earnings per common share	$	0.34	$	1.09

Earnings per common share – assuming dilution:
Net income attributable to Valero stockholders	$	141	$	469

Weighted-average common shares outstanding	416		431
Effect of dilutive securities	2		1
Weighted-average common shares outstanding – assuming dilution	418		432

Earnings per common share – assuming dilution	$	0.34	$	1.09

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~~VALERO ENERGY CORPORATION~~

~~CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

Six Months Ended June 30,
2018 2017

Participating
Securities

Common
Stock

Participating
Securities

Common
Stock
Earnings per common share:
Net income attributable to Valero stockholders $ 1,314
$ 853
Less dividends paid:
Common stock 688
625
Participating securities 2
2
Undistributed earnings
$ 624
$ 226
Weighted-average common shares outstanding 1
430
2
446
Earnings per common share:
Distributed earnings $ 1.60
$ 1.60
$ 1.40
$ 1.40
Undistributed earnings 1.45
1.45
0.50
0.50
Total earnings per common share $ 3.05
$ 3.05
$ 1.90
$ 1.90

Earnings per common share –
assuming dilution:

Net income attributable to Valero stockholders $ 1,314
$ 853
Weighted-average common shares outstanding 430
446
Common equivalent shares 2
2
Weighted-average common shares outstanding –
assuming dilution
432
448
Earnings per common share – assuming dilution $ 3.04
$ 1.90

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


11.	REVENUES AND SEGMENT INFORMATION

Revenue from Contracts with Customers

Disaggregation of Revenue

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

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VALERO ENERGY CORPORATION

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Receivables from Contracts with Customers

Our receivables from contracts with customers are included in ~~receivables, net~~“receivables, net” and totaled ~~$5.7~~$5.3 billion and $4.7 billion as of ~~June 30,~~March 31, 2019 and December 31, 2018, ~~and January 1, 2018.~~respectively.

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~~VALERO ENERGY CORPORATION~~

~~CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

Remaining Performance Obligations

~~The majority of our~~We have spot and term contracts with customers, the majority of which are spot contracts ~~and therefore have~~with no remaining performance obligations. ~~All~~We do not disclose remaining performance obligations for contracts that have terms of ~~our remaining contracts with customers are primarily term contracts, the majority of which expire by 2020.~~one year or less. The transaction price for ~~these~~our remaining term contracts includes ~~an immaterial~~a fixed ~~amount~~component and variable consideration (~~i.e.~~(i.e., a commodity price)~~. The variable consideration is~~, both of which are allocated entirely to a wholly unsatisfied promise to transfer a distinct good that forms part of a single performance ~~obligation; therefore,~~obligation. The fixed component is not material and the variable consideration is highly uncertain. Therefore, as of March 31, 2019, we have not ~~included in the remaining performance obligation. As of June 30, 2018, after excluding contracts with an original expected duration of one year or less,~~disclosed the aggregate amount of the transaction price allocated to our remaining performance ~~obligations was immaterial as the transaction price for these contracts includes only an immaterial fixed amount.~~obligations.

Segment Information

Effective January 1, 2019, we revised our reportable segments to align with certain changes in how our chief operating decision maker manages and allocates resources to our business. Accordingly, we created a new reportable segment — renewable diesel — because of the growing importance of renewable fuels in the market and the growth of our investments in renewable fuels production. The renewable diesel segment includes the operations of DGD, which were transferred from the refining segment on January 1, 2019. Also effective January 1, 2019, we no longer have a VLP segment, and we include the operations of VLP in our refining segment. This change was made because of the Merger Transaction with VLP, as described in Note 2, and the resulting change in how we manage VLP’s operations. We no longer manage VLP as a business but as logistics assets that support the operations of our refining segment. Our prior period segment information has been retrospectively adjusted to reflect our current segment presentation.

We have three reportable segments – refining, ethanol, and ~~VLP.~~renewable diesel. Each segment is a strategic business unit that offers different products and services by employing unique technologies and marketing strategies and whose operations and operating performance are managed and evaluated separately. Operating performance is measured based on the operating income generated by the segment, which includes revenues and expenses that are directly attributable to the management of the respective segment. Intersegment sales are generally derived from transactions made at prevailing market rates. The following is a description of each segment’s business operations.


•	The refining segment includes the operations of our 15 petroleum refineries, the associated marketing activities, and logistics assets that support our refining operations. The principal products manufactured by our refineries and sold by this segment include gasolines and blendstocks, distillates, and other products.

•

The ethanol segment includes the operations of our 14 ethanol plants, the associated marketing activities, and logistics assets that support our ethanol operations. The principal products manufactured by our ethanol plants are ethanol and distillers grains. This segment sells some ethanol to the refining segment for blending into gasoline, which is sold to that segment’s customers as a finished gasoline product.

~~The~~ ~~refining segment~~ ~~includes the operations~~

Table of our 15 petroleum refineries, the associated marketing activities, and certain logistics assets that support our refining operations that are not owned by VLP. The principal products manufactured by our refineries and sold by this segment include gasolines and blendstocks (~~e.g., conventional gasolines, premium gasolines, and gasoline meeting the specifications of the California Air Resources Board (CARB)), distillates (e.g., diesel, low-sulfur diesel, ultra-low-sulfur diesel, CARB diesel, jet fuel, and other distillates), and other products (e.g., asphalt, petrochemicals, lubricants, and other refined petroleum products).~~Contents

VALERO ENERGY CORPORATION

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


•	The renewable diesel segment includes the operations of DGD, our consolidated joint venture as discussed in Note 8. The principal product manufactured by DGD and sold by this segment is renewable diesel. This segment sells some renewable diesel to the refining segment, which is then sold to that segment’s customers.

~~The~~ ~~ethanol segment~~ includes the operations of our 11 ethanol plants, the associated marketing activities, and logistics assets that support our ethanol operations. The principal products manufactured by our ethanol plants are ethanol and distillers grains. We sell some ethanol to our refining segment for blending into gasoline, which is sold to that segment’s customers as a finished gasoline product.

~~The~~ ~~VLP segment~~ includes the results of VLP. VLP generates revenue from transportation and terminaling activities provided to our refining segment. All of VLP’s revenues are intersegment revenues that are generated under commercial agreements with our refining segment. Revenues generated under these agreements are eliminated in consolidation.

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

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



	Refining		Ethanol		Renewable Diesel		Corporate and Eliminations			Total
Three months ended March 31, 2019:
Revenues:
Revenues from external customers	$	23,218	$	793	$	252	$	—		$	24,263
Intersegment revenues	2		52		51		(105		)	—
Total revenues	23,220		845		303		(105		)	24,263
Cost of sales:
Cost of materials and other	21,165		694		224		(105		)	21,978
Operating expenses (excluding depreciation and amortization expense reflected below)	1,071		125		19		—			1,215
Depreciation and amortization expense	503		23		11		—			537
Total cost of sales	22,739		842		254		(105		)	23,730
Other operating expenses	2		—		—		—			2
General and administrative expenses (excluding depreciation and amortization expense reflected below)	—		—		—		209			209
Depreciation and amortization expense	—		—		—		14			14
Operating income by segment	$	479	$	3	$	49	$	(223	)	$	308

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VALERO ENERGY CORPORATION

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



	Refining		Ethanol		Renewable Diesel			Corporate and Eliminations			Total
Three months ended March 31, 2018:
Revenues:
Revenues from external customers	$	25,453	$	877	$	108		$	1		$	26,439
Intersegment revenues	4		46		42			(92		)	—
Total revenues	25,457		923		150			(91		)	26,439
Cost of sales:
Cost of materials and other	23,164		749		(65		)	(92		)	23,756
Operating expenses (excluding depreciation and amortization expense reflected below)	1,011		111		14			—			1,136
Depreciation and amortization expense	461		18		6			—			485
Total cost of sales	24,636		878		(45		)	(92		)	25,377
Other operating expenses	10		—		—			—			10
General and administrative expenses (excluding depreciation and amortization expense reflected below)	—		—		—			238			238
Depreciation and amortization expense	—		—		—			13			13
Operating income by segment	$	811	$	45	$	195		$	(250	)	$	801

The following table ~~reflects the components~~provides a disaggregation of ~~operating income~~revenues from external customers for our principal products by reportable segment (in millions):

Refining Ethanol VLP
Corporate
and
Eliminations
Total
Three months ended June 30, 2018:
Revenues:
Revenues from external customers $ 30,130
$ 884
$ —
$ 1
$ 31,015
Intersegment revenues 1
42
135
(178 ) —
Total revenues 30,131
926
135
(177 ) 31,015
Cost of sales:
Cost of materials and other 27,283
754
—
(177 ) 27,860
Operating expenses (excluding depreciation
and amortization expense reflected below)
969
109
33
(1 ) 1,110
Depreciation and amortization expense 471
20
19
—
510
Total cost of sales 28,723
883
52
(178 ) 29,480
Other operating expenses 21
—
—
—
21
General and administrative expenses (excluding
depreciation and amortization expense reflected
below)
—
—
—
248
248
Depreciation and amortization expense —
—
—
13
13
Operating income by segment $ 1,387
$ 43
$ 83
$ (260 ) $ 1,253

Three months ended June 30, 2017:
Revenues:
Revenues from external customers $ 21,415
$ 839
$ —
$ —
$ 22,254
Intersegment revenues —
28
110
(138 ) —
Total revenues 21,415
867
110
(138 ) 22,254
Cost of sales:
Cost of materials and other 19,037
710
—
(138 ) 19,609
Operating expenses (excluding depreciation
and amortization expense reflected below)
979
107
27
(2 ) 1,111
Depreciation and amortization expense 454
19
12
—
485
Total cost of sales 20,470
836
39
(140 ) 21,205
General and administrative expenses (excluding
depreciation and amortization expense reflected
below)
—
—
—
175
175
Depreciation and amortization expense —
—
—
14
14
Operating income by segment $ 945
$ 31
$ 71
$ (187 ) $ 860



	Three Months Ended March 31,
	2019		2018
Refining:
Gasolines and blendstocks	$	9,374	$	10,629
Distillates	11,917		12,550
Other product revenues	1,927		2,274
Total refining revenues	23,218		25,453
Ethanol:
Ethanol	620		701
Distillers grains	173		176
Total ethanol revenues	793		877
Renewable diesel:
Renewable diesel	252		108
Corporate – other revenues	—		1
Revenues	$	24,263	$	26,439

Table of Contents

VALERO ENERGY CORPORATION

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Refining Ethanol VLP
Corporate
and
Eliminations
Total
Six months ended June 30, 2018:
Revenues:
Revenues from external customers $ 55,691
$ 1,761
$ —
$ 2
$ 57,454
Intersegment revenues 5
88
267
(360 ) —
Total revenues 55,696
1,849
267
(358 ) 57,454
Cost of sales:
Cost of materials and other 50,471
1,503
—
(358 ) 51,616
Operating expenses (excluding depreciation
and amortization expense reflected below)
1,966
220
62
(2 ) 2,246
Depreciation and amortization expense 919
38
38
—
995
Total cost of sales 53,356
1,761
100
(360 ) 54,857
Other operating expenses 31
—
—
—
31
General and administrative expenses (excluding
depreciation and amortization expense reflected
below)
—
—
—
486
486
Depreciation and amortization expense —
—
—
26
26
Operating income by segment $ 2,309
$ 88
$ 167
$ (510 ) $ 2,054

Six months ended June 30, 2017:
Revenues:
Revenues from external customers $ 42,302
$ 1,724
$ —
$ —
$ 44,026
Intersegment revenues —
88
216
(304 ) —
Total revenues 42,302
1,812
216
(304 ) 44,026
Cost of sales:
Cost of materials and other 37,844
1,497
—
(304 ) 39,037
Operating expenses (excluding depreciation
and amortization expense reflected below)
1,970
216
51
(2 ) 2,235
Depreciation and amortization expense 903
46
24
—
973
Total cost of sales 40,717
1,759
75
(306 ) 42,245
General and administrative expenses (excluding
depreciation and amortization expense reflected
below)
—
—
—
367
367
Depreciation and amortization expense —
—
—
26
26
Operating income by segment $ 1,585
$ 53
$ 141
$ (391 ) $ 1,388

~~Table of Contents~~

~~VALERO ENERGY CORPORATION~~

~~CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

The following table provides a disaggregation of revenues by reportable segment (in millions). Refining and ethanol segment revenues are disaggregated for our principal products, and VLP segment revenues are disaggregated by activity type.

Three Months Ended
June 30, Six Months Ended
June 30,
2018 2017 2018 2017
Refining:
Gasolines and blendstocks $ 12,514
$ 9,723
$ 23,143
$ 19,058
Distillates 14,459
9,736
27,117
19,432
Other product revenues 3,157
1,956
5,431
3,812
Total refining revenues 30,130
21,415
55,691
42,302
Ethanol:
Ethanol 696
712
1,397
1,462
Distillers grains 188
127
364
262
Total ethanol revenues 884
839
1,761
1,724
VLP:
Pipeline transportation 31
25
62
48
Terminaling 103
84
202
167
Storage and other 1
1
3
1
Total VLP revenues 135
110
267
216
Corporate – other revenues 1
—
2
—
Elimination of intersegment revenues (135 ) (110 ) (267 ) (216 )
Revenues $ 31,015
$ 22,254
$ 57,454
$ 44,026

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



	March 31, 2019		December 31, 2018
Refining	$	45,487	$	43,488
Ethanol	1,718		1,691
Renewable diesel	844		787
Corporate and eliminations	4,046		4,189
Total assets	$	52,095	$	50,155

June 30,
2018 December 31,
2017
Refining $ 42,107
$ 40,382
Ethanol 1,332
1,344
VLP 1,569
1,517
Corporate and eliminations 5,670
6,915
Total assets $ 50,678
$ 50,158

~~Table of Contents~~

~~VALERO ENERGY CORPORATION~~

~~CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~


12.	SUPPLEMENTAL CASH FLOW INFORMATION

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



	Three Months Ended March 31,
	2019			2018
Decrease (increase) in current assets:
Receivables, net	$	(895	)	$	145
Inventories	28			(126		)
Prepaid expenses and other	16			(79		)
Increase (decrease) in current liabilities:
Accounts payable	1,400			(322		)
Accrued expenses	(167		)	(131		)
Taxes other than income taxes payable	(263		)	(111		)
Income taxes payable	11			(402		)
Changes in current assets and current liabilities	$	130		$	(1,026	)

Six Months Ended
June 30,
2018 2017
Decrease (increase) in current assets:
Receivables, net $ (595 ) $ 1,396
Inventories (46 ) 123
Prepaid expenses and other (35 ) 86
Increase (decrease) in current liabilities:
Accounts payable 661
(942 )
Accrued expenses (83 ) 262
Taxes other than income taxes payable 28
(41 )
Income taxes payable (375 ) (25 )
Changes in current assets and current liabilities $ (445 ) $ 859

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



	Three Months Ended March 31,
	2019		2018
Interest paid in excess of amount capitalized, including interest on finance leases	$	96	$	127
Income taxes paid, net	59		552

Six Months Ended
June 30,
2018 2017
Interest paid in excess of amount capitalized $ 248
$ 235
Income taxes paid, net 817
263

~~There were nosignificant noncash investing and financing activities for the six months ended June 30, 2018.~~Noncash investing and financing activities during the six months ended June 30, 2017 included the recognition of capital lease assets and related obligations totaling approximately $490 million for the lease of storage tanks located at three of our refineries.

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VALERO ENERGY CORPORATION

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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



	Three Months Ended March 31, 2019
	Operating Leases			Finance Leases
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows	$	107		$	11
Financing cash flows	—			6
ROU assets obtained in exchange for new lease liabilities (a)	1,430			2
Changes in lease balances resulting from lease modifications	(26		)	—

___________________


(a)	Includes noncash activity of $1.3 billion for ROU assets for operating leases recorded on January 1, 2019 upon adoption of Topic 842.

Noncash investing and financing activities during the three months ended March 31, 2019 also included the derecognition of the property, plant, and equipment and long-term liability related to previous owner accounting and the recognition of our investment in joint venture associated with a build-to-suit lease arrangement as described in Note 6.

There were no significant noncash investing and financing activities during the three months ended March 31, 2018.

Table of Contents

VALERO ENERGY CORPORATION

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


13.	FAIR VALUE MEASUREMENTS

Recurring Fair Value Measurements

The following tables present information (in millions) about our assets and liabilities recognized at their fair values in our balance sheets categorized according to the fair value hierarchy of the inputs utilized by us to determine the fair values as of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018.

We have elected to offset the fair value amounts recognized for multiple similar derivative contracts executed with the same counterparty, including any related cash collateral assets or obligations as shown below; however, fair value amounts by hierarchy level are presented in the following tables on a gross basis. We have no derivative contracts that are subject to master netting arrangements that are reflected gross on the balance sheet.


	June 30, 2018																			March 31, 2019
							Total Gross Fair Value		Effect of Counter- party Netting			Effect of Cash Collateral Netting			Net Carrying Value on Balance Sheet		Cash Collateral Paid or Received Not Offset									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																			Fair Value Hierarchy
	Level 1		Level 2		Level 3															Level 1		Level 2		Level 3
Assets:
Commodity derivative contracts	$	1,402	$	34	$	—	$	1,436	$	(1,434	)	$	—		$	2	$	—		$	638	$	—	$	—	$	638	$	(560	)	$	(30	)	$	48	$	—
Foreign currency contracts	2		—		—		2		n/a			n/a			2		n/a			3		—		—		3		n/a			n/a			3		n/a
Investments of certain benefit plans	61		—		9		70		n/a			n/a			70		n/a			61		—		9		70		n/a			n/a			70		n/a
Total	$	1,465	$	34	$	9	$	1,508	$	(1,434	)	$	—		$	74				$	702	$	—	$	9	$	711	$	(560	)	$	(30	)	$	121

Liabilities:
Commodity derivative contracts	$	1,430	$	37	$	—	$	1,467	$	(1,434	)	$	(32	)	$	1	$	(57	)	$	573	$	—	$	—	$	573	$	(560	)	$	(13	)	$	—	$	(47	)
Environmental credit obligations	—		70		—		70		n/a			n/a			70		n/a			—		17		—		17		n/a			n/a			17		n/a
Physical purchase contracts	—		13		—		13		n/a			n/a			13		n/a			—		6		—		6		n/a			n/a			6		n/a
Foreign currency contracts																				20		—		—		20		n/a			n/a			20		n/a
Total	$	1,430	$	120	$	—	$	1,550	$	(1,434	)	$	(32	)	$	84				$	593	$	23	$	—	$	616	$	(560	)	$	(13	)	$	43

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VALERO ENERGY CORPORATION

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



	December 31, 2018
							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	$	2,792	$	—	$	—	$	2,792	$	(2,669	)	$	(34	)	$	89	$	—
Foreign currency contracts	4		—		—		4		n/a			n/a			4		n/a
Investments of certain benefit plans	60		—		9		69		n/a			n/a			69		n/a
Total	$	2,856	$	—	$	9	$	2,865	$	(2,669	)	$	(34	)	$	162

Liabilities:
Commodity derivative contracts	$	2,681	$	—	$	—	$	2,681	$	(2,669	)	$	(12	)	$	—	$	(136	)
Environmental credit obligations	—		13		—		13		n/a			n/a			13		n/a
Physical purchase contracts	—		5		—		5		n/a			n/a			5		n/a
Foreign currency contracts	1		—		—		1		n/a			n/a			1		n/a
Total	$	2,682	$	18	$	—	$	2,700	$	(2,669	)	$	(12	)	$	19

December 31, 2017

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
$ 875
$ 19
$ —
$ 894
$ (893 ) $ —
$ 1
$ —
Investments of certain
benefit plans
65
—
8
73
n/a
n/a
73
n/a
Total $ 940
$ 19
$ 8
$ 967
$ (893 ) $ —
$ 74

Liabilities:
Commodity derivative
contracts
$ 955
$ 14
$ —
$ 969
$ (893 ) $ (76 ) $ —
$ (102 )
Environmental credit
obligations
—
104
—
104
n/a
n/a
104
n/a
Physical purchase
contracts
—
6
—
6
n/a
n/a
6
n/a
Foreign currency
contracts
7
—
—
7
n/a
n/a
7
n/a
Total $ 962
$ 124
$ —
$ 1,086
$ (893 ) $ (76 ) $ 117

A description of our assets and liabilities recognized at fair value along with the valuation methods and inputs we used to develop their fair value measurements are as follows:

•

Commodity derivative contracts consist primarily of exchange-traded futures, which are used to reduce the impact of price volatility on our results of operations and cash flows as discussed in Note 14. These contracts are measured at fair value using the market approach. Exchange-traded futures are valued based on quoted prices from the commodity exchange and are categorized in Level 1 of the fair value hierarchy.

Commodity derivative contracts consist primarily of exchange-traded futures and swaps. 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 plan assets categorized in Level 1 of the fair value hierarchy are measured at fair value using a market approach based on quoted prices from national securities exchanges. The plan assets categorized in Level 3 of the fair value hierarchy represent insurance contracts, the fair value of which is provided by the insurer.

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VALERO ENERGY CORPORATION

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Foreign currency contracts consist of foreign currency exchange and purchase contracts ~~entered into for~~and foreign currency swap agreements related to our international operations to manage our exposure to exchange rate fluctuations on transactions denominated in currencies other than the local (functional) currencies of ~~those~~our 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 similar programs (collectively, the cap-and-trade systems). To the degree we are unable to blend biofuels (such as ethanol and biodiesel) at percentages required under the biofuel programs, we must purchase biofuel credits to comply with these programs. Under the cap-and-trade systems, we must purchase emission credits to comply with these systems. 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.

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), Quebec’s~~ ~~Environmental Quality Act~~ ~~(the Quebec cap-and-trade system), and Ontario’s~~ ~~Climate Change Mitigation and Low-Carbon Economy Act~~ (the Ontario 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 14~~ 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~~into or out of Level 3 for assets and liabilities held as of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 that were measured at fair value on a recurring basis.

There was no significant activity during the three ~~and~~ ~~six~~ months ended ~~June 30, 2018~~March 31, 2019 and ~~2017~~2018 related to the fair value amounts categorized in Level 3 as of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018.

Nonrecurring Fair Value Measurements

There were no assets or liabilities that were measured at fair value on a nonrecurring basis as of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018.

Other Financial Instruments

Financial instruments that we recognize in our balance sheets at their carrying amounts are shown in the following table along with their associated fair values (in millions):



		March 31, 2019				December 31, 2018
	Fair Value Hierarchy	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:
Cash and cash equivalents	Level 1	$	2,777	$	2,777	$	2,982	$	2,982
Financial liabilities:
Debt (excluding finance leases)	Level 2	9,511		10,617		8,503		8,986

June 30, 2018 December 31, 2017

Fair Value
Hierarchy

Carrying
Amount

Fair
Value

Carrying
Amount

Fair
Value
Financial assets:
Cash and cash equivalents Level 1 $ 4,451
$ 4,451
$ 5,850
$ 5,850
Financial liabilities:
Debt (excluding capital leases) Level 2 8,451
9,310
8,310
9,795

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VALERO ENERGY CORPORATION

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


14.	PRICE RISK MANAGEMENT ACTIVITIES

General

We are exposed to market risks primarily related to the volatility in the price of commodities, ~~and~~ foreign currency exchange rates, and the price of credits needed to comply with various government and regulatory programs. We enter into derivative instruments to manage some of these risks, including derivative instruments related to the various commodities we purchase or produce, and foreign currency exchange and purchase contracts, as described below under “Risk Management Activities by Type of Risk.” These derivative instruments are recorded as either assets or liabilities measured at their fair values (see Note ~~13)~~13), 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.”

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 petroleum 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~~such as 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~~We primarily use commodity ~~price risk, we use~~derivative instruments as economic hedges, which are not designated as ~~fair value or cash flow hedges,~~hedging instruments, and we use fair value and cash flow hedges from time to time. We ~~also enter into certain~~had no commodity derivative instruments ~~for trading purposes.~~ outstanding as of March 31, 2019 and 2018, and no activity during the three months ended March 31, 2019 and 2018 that were designated as fair value or cash flow hedges.

Our objectives for ~~entering into hedges or trading derivatives are described below.~~

~~Economic Hedges~~ – Economic hedges represent commodity derivative instruments that are used to manage price volatility in certain (i) feedstock and refined petroleum product inventories, (ii) fixed-price purchase contracts, and (iii) forecasted feedstock, refined petroleum product or natural gas purchases and refined petroleum product sales. The objectives of ourholding economic hedges are to ~~hedge~~(i) manage price volatility in certain feedstock and refined petroleum product inventories and tofixed-price purchase contracts, and (ii) lock in the price of forecasted feedstock, refined petroleum product, or natural gas purchases orand refined petroleum 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.

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VALERO ENERGY CORPORATION

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of ~~June 30, 2018,~~March 31, 2019, 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 2018 2019
Crude oil and refined petroleum products:
Swaps – long 9,892
135
Swaps – short 10,115
—
Futures – long 93,569
—
Futures – short 95,354
6
Corn:
Futures – long 48,500
150
Futures – short 86,310
8,415
Physical contracts – long 41,029
8,264
Soybean oil:
Futures – long 65,519
—
Futures – short 169,018
—

~~Table of Contents~~

~~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 petroleum products.~~

~~As of~~ ~~June 30, 2018~~, 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 in 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	2019	2020
Crude oil and refined petroleum products:
Futures – long	123,087	3,856
Futures – short	130,923	5,456
Options – long	21,000	—
Options – short	21,000	—
Corn:
Futures – long	19,005	1,275
Futures – short	43,770	3,515
Physical contracts – long	23,726	2,238

Notional Contract Volumes by
Year of Maturity
Derivative Instrument 2018 2019
Crude oil and refined petroleum products:
Swaps – long 300
—
Swaps – short 300
—
Futures – long 55,504
7,701
Futures – short 55,402
7,751
Options – long 75,800
—
Options – short 75,400
—
Corn:
Futures – long 150
—

~~We had no commodity derivative contracts outstanding as of June 30, 2018 and 2017 or during the three and~~ ~~six~~ ~~months ended~~ ~~June 30, 2018~~ ~~and 2017 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~~related to our international operations that are denominated in currencies other than the local (functional) currencies of ~~those~~our 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 ~~June 30, 2018~~,March 31, 2019, we had ~~forward~~foreign currency contracts to purchase ~~$487~~$418 million of U.S. ~~dollars. All~~dollars, $1.7 billion of U.S. dollar equivalent Canadian dollars, and $300 million of U.S. dollar equivalent pounds sterling. The majority of these commitments matured on or before ~~July 31, 2018.~~April 30, 2019.

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 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 $91 million and $206 million for the three months ended March 31, 2019 and 2018, respectively. These amounts are reflected in cost of materials and other.

3129

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VALERO ENERGY CORPORATION

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

favorable. The cost of meeting our obligations under these compliance programs was $131 million and $255 million for the three months ended June 30, 2018 and 2017, respectively, and $337 million and ~~$401 million~~ ~~for the six months ended June 30, 2018 and 2017, respectively. These amounts are reflected in cost of materials and other.~~

We are subject to additional requirements under greenhouse gas (GHG) emission programs, including the cap-and-trade systems, as discussed in Note 13. Under these cap-and-trade systems, we purchase various GHG emission credits available on the open market. Therefore, we are exposed to the volatility in the market price of these credits. The cost to implement certain provisions of the cap-and-trade systems are significant; however, we recovered the majority of these costs from our customers for the three and six months ended June 30, 2018 and 2017 and expect to continue to recover the majority of these costs in the future. For the three and six months ended June 30, 2018 and 2017, 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 ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 (in millions) and the line items in the balance sheets in which the fair values are reflected. See Note 13 for additional information related to the fair values of our derivative instruments.

As indicated in Note 13, we net fair value amounts recognized for multiple similar derivative contracts executed with the same counterparty under master netting arrangements, including cash collateral assets and obligations. The following tables, however, are presented on a gross asset and gross liability basis, which results in the reflection of certain assets in liability accounts and certain liabilities in asset accounts.

Balance Sheet
Location
June 30, 2018

Asset
Derivatives

Liability
Derivatives
Derivatives not designated as
hedging instruments

Commodity contracts:
Futures Receivables, net $ 1,398
$ 1,426
Swaps Receivables, net 11
11
Swaps Accounts payable —
1
Options Receivables, net 27
29
Physical purchase contracts Inventories —
13
Foreign currency contracts Receivables, net 2
—
Total $ 1,438
$ 1,480

~~Table of Contents~~

~~VALERO ENERGY CORPORATION~~

~~CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

Balance Sheet
Location
December 31, 2017

Asset
Derivatives

Liability
Derivatives
Derivatives not designated as
hedging instruments

Commodity contracts:
Futures Receivables, net $ 875
$ 955
Swaps Receivables, net 11
11
Options Receivables, net 8
3
Physical purchase contracts Inventories —
6
Foreign currency contracts Accrued expenses —
7
Total $ 894
$ 982



	Balance Sheet Location	March 31, 2019				December 31, 2018
	Balance Sheet Location	Asset Derivatives		Liability Derivatives		Asset Derivatives		Liability Derivatives
Derivatives not designated as hedging instruments:
Commodity contracts	Receivables, net	$	638	$	573	$	2,792	$	2,681
Physical purchase contracts	Inventories	—		6		—		5
Foreign currency contracts	Receivables, net	3		—		4		—
Foreign currency contracts	Accrued expenses	—		20		—		1
Total		$	641	$	599	$	2,796	$	2,687

Market Risk

Our price risk management activities involve the receipt or payment of fixed price commitments into the future. These transactions give rise to market risk, which is the risk that future changes in market conditions may make an instrument less valuable. We closely monitor and manage our exposure to market risk on a daily basis in accordance with policies approved by our board of directors. Market risks are monitored by our risk control group to ensure compliance with our stated risk management policy. We do not require any collateral or other security to support derivative instruments into which we enter. We also do not have any derivative instruments that require us to maintain a minimum investment-grade credit rating.

Effect of Derivative Instruments on Income

The following ~~tables provide~~table provides information about the gain or loss recognized in income on our derivative instruments and the line items in the statements of income in which such ~~gains and~~ losses are reflected (in millions).



	Location of Gain (Loss) Recognized in Income on Derivatives	Three Months Ended March 31,
	Location of Gain (Loss) Recognized in Income on Derivatives	2019			2018
Derivatives not designated as hedging instruments:
Commodity contracts	Cost of materials and other	$	(71	)	$	(12	)
Foreign currency contracts	Cost of materials and other	(9		)	(3		)
Foreign currency contracts	Other income, net	7			—

Derivatives Designated as
Economic Hedges
Location of Gain (Loss)
Recognized in Income
on Derivatives Three Months Ended
June 30, Six Months Ended
June 30,
2018 2017 2018 2017
Commodity contracts Cost of materials and other $ (66 ) $ 25
$ (114 ) $ (72 )
Foreign currency contracts Cost of materials and other 17
(20 ) 14
(26 )

Trading Derivatives Location of Gain (Loss)
Recognized in Income
on Derivatives Three Months Ended
June 30, Six Months Ended
June 30,
2018 2017 2018 2017
Commodity contracts Cost of materials and other $ 51
$ (3 ) $ 87
$ (2 )

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VALERO ENERGY CORPORATION

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


15.	CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

In connection with the completion of the Merger Transaction as described in Note 2, Valero Energy Corporation, the parent company, entered into a guarantee agreement to fully and unconditionally guarantee the prompt payment, when due, of the following debt issued by Valero Energy Partners LP, an indirect wholly owned subsidiary of Valero Energy Corporation, that was outstanding as of March 31, 2019:

•4.375 percent Senior Notes due December 15, 2026, and

•4.5 percent Senior Notes due March 15, 2028.

The following condensed consolidating financial information is provided as an alternative to providing separate financial statements for Valero Energy Partners LP, which has no independent assets or operations. The financial position, results of operations, and cash flows of Valero Energy Partners LP’s wholly owned subsidiaries are included in “Other Non-Guarantor Subsidiaries.” The accounts for all companies reflected herein are presented using the equity method of accounting for investments in subsidiaries.

Table of Contents

VALERO ENERGY CORPORATION

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Condensed Consolidating Balance Sheet

March 31, 2019

(in millions)



	Valero Energy Corporation			Valero Energy Partners LP		Other Non- Guarantor Subsidiaries			Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	1,167		$	—	$	1,610		$	—		$	2,777
Receivables, net	—			—		8,289			—			8,289
Receivables from affiliates	4,277			—		11,315			(15,592		)	—
Inventories	—			—		6,554			—			6,554
Prepaid expenses and other	451			—		409			—			860
Total current assets	5,895			—		28,177			(15,592		)	18,480
Property, plant and equipment, at cost	—			—		42,388			—			42,388
Accumulated depreciation	—			—		(13,980		)	—			(13,980		)
Property, plant and equipment, net	—			—		28,408			—			28,408
Investment in affiliates	35,820			2,348		392			(38,560		)	—
Deferred charges and other assets, net	513			—		4,694			—			5,207
Total assets	$	42,228		$	2,348	$	61,671		$	(54,152	)	$	52,095
LIABILITIES AND EQUITY
Current liabilities:
Current portion of debt and finance lease obligations	$	849		$	—	$	261		$	—		$	1,110
Accounts payable	2			—		10,003			—			10,005
Accounts payable to affiliates	10,358			957		4,277			(15,592		)	—
Accrued expenses	152			7		613			—			772
Taxes other than income taxes payable	—			—		961			—			961
Income taxes payable	34			—		31			—			65
Total current liabilities	11,395			964		16,146			(15,592		)	12,913
Debt and finance lease obligations, less current portion	7,091			990		925			—			9,006
Deferred income tax liabilities	—			2		4,865			—			4,867
Other long-term liabilities	1,963			—		1,567			—			3,530
Equity:
Stockholders’ equity:
Common stock	7			—		1			(1		)	7
Additional paid-in capital	6,802			—		9,754			(9,754		)	6,802
Treasury stock, at cost	(14,958		)	—		—			—			(14,958		)
Retained earnings	30,810			—		28,911			(28,911		)	30,810
Partners’ equity	—			392		—			(392		)	—
Accumulated other comprehensive loss	(1,352		)	—		(968		)	968			(1,352		)
Total stockholders’ equity	21,309			392		37,698			(38,090		)	21,309
Noncontrolling interests	470			—		470			(470		)	470
Total equity	21,779			392		38,168			(38,560		)	21,779
Total liabilities and equity	$	42,228		$	2,348	$	61,671		$	(54,152	)	$	52,095

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VALERO ENERGY CORPORATION

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Condensed Consolidating Balance Sheet

December 31, 2018

(in millions)



	Valero Energy Corporation			Valero Energy Partners LP		Other Non- Guarantor Subsidiaries			Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	291		$	152	$	2,539		$	—		$	2,982
Receivables, net	—			—		7,345			—			7,345
Receivables from affiliates	4,369			2		11,025			(15,396		)	—
Inventories	—			—		6,532			—			6,532
Prepaid expenses and other	466			—		355			(5		)	816
Total current assets	5,126			154		27,796			(15,401		)	17,675
Property, plant and equipment, at cost	—			—		42,473			—			42,473
Accumulated depreciation	—			—		(13,625		)	—			(13,625		)
Property, plant and equipment, net	—			—		28,848			—			28,848
Investment in affiliates	36,101			2,267		299			(38,667		)	—
Long-term notes receivable from affiliates	285			—		—			(285		)	—
Deferred charges and other assets, net	572			1		3,059			—			3,632
Total assets	$	42,084		$	2,422	$	60,002		$	(54,353	)	$	50,155
LIABILITIES AND EQUITY
Current liabilities:
Current portion of debt and finance lease obligations	$	—		$	—	$	238		$	—		$	238
Accounts payable	14			—		8,580			—			8,594
Accounts payable to affiliates	10,188			837		4,370			(15,395		)	—
Accrued expenses	155			7		468			—			630
Accrued expenses to affiliates	—			1		—			(1		)	—
Taxes other than income taxes payable	—			—		1,213			—			1,213
Income taxes payable	53			1		—			(5		)	49
Total current liabilities	10,410			846		14,869			(15,401		)	10,724
Debt and finance lease obligations, less current portion	6,955			990		926			—			8,871
Long-term notes payable to affiliates	—			285		—			(285		)	—
Deferred income taxes	—			2		4,960			—			4,962
Other long-term liabilities	1,988			—		879			—			2,867
Equity:
Stockholders’ equity:
Common stock	7			—		1			(1		)	7
Additional paid-in capital	7,048			—		9,754			(9,754		)	7,048
Treasury stock, at cost	(14,925		)	—		—			—			(14,925		)
Retained earnings	31,044			—		28,646			(28,646		)	31,044
Partners’ equity	—			299		—			(299		)	—
Accumulated other comprehensive loss	(1,507		)	—		(1,097		)	1,097			(1,507		)
Total stockholders’ equity	21,667			299		37,304			(37,603		)	21,667
Noncontrolling interests	1,064			—		1,064			(1,064		)	1,064
Total equity	22,731			299		38,368			(38,667		)	22,731
Total liabilities and equity	$	42,084		$	2,422	$	60,002		$	(54,353	)	$	50,155

Table of Contents

VALERO ENERGY CORPORATION

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Condensed Consolidating Statement of Income

Three Months Ended March 31, 2019

(in millions)



	Valero Energy Corporation			Valero Energy Partners LP			Other Non- Guarantor Subsidiaries			Eliminations			Consolidated
Revenues	$	—		$	—		$	24,263		$	—		$	24,263
Cost of sales:
Cost of materials and other	—			—			21,978			—			21,978
Operating expenses (excluding depreciation and amortization expense reflected below)	—			—			1,215			—			1,215
Depreciation and amortization expense	—			—			537			—			537
Total cost of sales	—			—			23,730			—			23,730
Other operating expenses	—			—			2			—			2
General and administrative expenses (excluding depreciation and amortization expense reflected below)	1			—			208			—			209
Depreciation and amortization expense	—			—			14			—			14
Operating income (loss)	(1		)	—			309			—			308
Equity in earnings of subsidiaries	264			82			90			(436		)	—
Other income, net	54			—			147			(179		)	22
Interest and debt expense, net of capitalized interest	(232		)	(15		)	(44		)	179			(112		)
Income before income tax expense	85			67			502			(436		)	218
Income tax expense (benefit)	(82		)	—			133			—			51
Net income	167			67			369			(436		)	167
Less: Net income attributable to noncontrolling interests	26			—			23			(23		)	26
Net income attributable to stockholders	$	141		$	67		$	346		$	(413	)	$	141

Table of Contents

VALERO ENERGY CORPORATION

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Condensed Consolidating Statement of Income

Three Months Ended March 31, 2018

(in millions)



	Valero Energy Corporation			Valero Energy Partners LP			Other Non- Guarantor Subsidiaries			Eliminations			Consolidated
Revenues	$	—		$	—		$	26,439		$	—		$	26,439
Cost of sales:
Cost of materials and other	—			—			23,756			—			23,756
Operating expenses (excluding depreciation and amortization expense reflected below)	—			—			1,136			—			1,136
Depreciation and amortization expense	—			—			485			—			485
Total cost of sales	—			—			25,377			—			25,377
Other operating expenses	—			—			10			—			10
General and administrative expenses (excluding depreciation and amortization expense reflected below)	1			—			237			—			238
Depreciation and amortization expense	—			—			13			—			13
Operating income (loss)	(1		)	—			802			—			801
Equity in earnings of subsidiaries	720			78			163			(961		)	—
Other income, net	69			—			151			(169		)	51
Interest and debt expense, net of capitalized interest	(218		)	(12		)	(60		)	169			(121		)
Income before income tax expense	570			66			1,056			(961		)	731
Income tax expense (benefit)	(12		)	—			161			—			149
Net income	582			66			895			(961		)	582
Less: Net income attributable to noncontrolling interests	113			—			97			(97		)	113
Net income attributable to stockholders	$	469		$	66		$	798		$	(864	)	$	469

Table of Contents

VALERO ENERGY CORPORATION

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Condensed Consolidating Statement of Comprehensive Income

Three Months Ended March 31, 2019

(in millions)



	Valero Energy Corporation		Valero Energy Partners LP		Other Non- Guarantor Subsidiaries		Eliminations			Consolidated
Net income	$	167	$	67	$	369	$	(436	)	$	167
Other comprehensive income:
Foreign currency translation adjustment	155		—		159		(159		)	155
Net gain on pension and other postretirement benefits	3		—		—		—			3
Other comprehensive income before income tax expense	158		—		159		(159		)	158
Income tax expense related to items of other comprehensive income	1		—		—		—			1
Other comprehensive income	157		—		159		(159		)	157
Comprehensive income	324		67		528		(595		)	324
Less: Comprehensive income attributable to noncontrolling interests	—		—		28		—			28
Comprehensive income attributable to stockholders	$	324	$	67	$	500	$	(595	)	$	296

Table of Contents

VALERO ENERGY CORPORATION

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Condensed Consolidating Statement of Comprehensive Income

Three Months Ended March 31, 2018

(in millions)



	Valero Energy Corporation		Valero Energy Partners LP		Other Non- Guarantor Subsidiaries		Eliminations			Consolidated
Net income	$	582	$	66	$	895	$	(961	)	$	582
Other comprehensive income:
Foreign currency translation adjustment	45		—		45		(45		)	45
Net gain on pension and other postretirement benefits	8		—		—		—			8
Other comprehensive income before income tax expense	53		—		45		(45		)	53
Income tax expense related to items of other comprehensive income	2		—		—		—			2
Other comprehensive income	51		—		45		(45		)	51
Comprehensive income	633		66		940		(1,006		)	633
Less: Comprehensive income attributable to noncontrolling interests	—		—		116		—			116
Comprehensive income attributable to stockholders	$	633	$	66	$	824	$	(1,006	)	$	517

Table of Contents

VALERO ENERGY CORPORATION

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Condensed Consolidating Statement of Cash Flows

Three Months Ended March 31, 2019

(in millions)



	Valero Energy Corporation			Valero Energy Partners LP			Other Non- Guarantor Subsidiaries			Eliminations			Consolidated
Net cash provided by (used in) operating activities	$	(21	)	$	(14	)	$	1,069		$	(157	)	$	877
Cash flows from investing activities:
Capital expenditures	—			—			(444		)	—			(444		)
Deferred turnaround and catalyst costs	—			—			(219		)	—			(219		)
Investments in joint ventures	—			—			(63		)	—			(63		)
Capital expenditures of certain VIEs	—			—			(19		)	—			(19		)
Acquisitions of undivided interests	—			—			(1		)	—			(1		)
Intercompany investing activities	307			2			(148		)	(161		)	—
Other investing activities, net	—			—			(1		)	—			(1		)
Net cash provided by (used in) investing activities	307			2			(895		)	(161		)	(747		)
Cash flows from financing activities:
Proceeds from debt issuances and borrowings (excluding borrowings of certain VIEs)	992			—			900			—			1,892
Proceeds from borrowings of certain VIEs	—			—			23			—			23
Repayments of debt and finance lease obligations	—			—			(907		)	—			(907		)
Intercompany financing activities	27			(64		)	(124		)	161			—
Purchases of common stock for treasury	(36		)	—			—			—			(36		)
Common stock dividends	(375		)	—			(81		)	81			(375		)
Acquisition of VLP publicly held common units	—			—			(950		)	—			(950		)
Distributions to unitholders of VLP	—			(76		)	—			76			—
Other financing activities, net	(18		)	—			(7		)	—			(25		)
Net cash provided by (used in) financing activities	590			(140		)	(1,146		)	318			(378		)
Effect of foreign exchange rate changes on cash	—			—			43			—			43
Net increase (decrease) in cash and cash equivalents	876			(152		)	(929		)	—			(205		)
Cash and cash equivalents at beginning of period	291			152			2,539			—			2,982
Cash and cash equivalents at end of period	$	1,167		$	—		$	1,610		$	—		$	2,777

Table of Contents

VALERO ENERGY CORPORATION

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Condensed Consolidating Statement of Cash Flows

Three Months Ended March 31, 2018

(in millions)



	Valero Energy Corporation			Valero Energy Partners LP			Other Non- Guarantor Subsidiaries			Eliminations			Consolidated
Net cash provided by (used in) operating activities	$	(356	)	$	(10	)	$	560		$	(56	)	$	138
Cash flows from investing activities:
Capital expenditures	—			—			(356		)	—			(356		)
Deferred turnaround and catalyst costs	—			—			(220		)	—			(220		)
Investments in joint ventures	—			—			(55		)	—			(55		)
Capital expenditures of certain VIEs	—			—			(28		)	—			(28		)
Acquisitions of undivided interests	—			—			(85		)	—			(85		)
Intercompany investing activities	163			92			(488		)	233			—
Other investing activities, net	—			—			(8		)	—			(8		)
Net cash provided by (used in) investing activities	163			92			(1,240		)	233			(752		)
Cash flows from financing activities:
Proceeds from debt issuances and borrowings	—			498			—			—			498
Repayments of debt and finance lease obligations	—			(410		)	(5		)	—			(415		)
Intercompany financing activities	491			(88		)	(170		)	(233		)	—
Purchases of common stock for treasury	(320		)	—			—			—			(320		)
Common stock dividends	(345		)	—			(17		)	17			(345		)
Contributions from noncontrolling interests	—			—			32			—			32
Distributions to unitholders of VLP	—			(50		)	—			39			(11		)
Other financing activities, net	5			(3		)	(14		)	—			(12		)
Net cash used in financing activities	(169		)	(53		)	(174		)	(177		)	(573		)
Effect of foreign exchange rate changes on cash	—			—			(5		)	—			(5		)
Net increase (decrease) in cash and cash equivalents	(362		)	29			(859		)	—			(1,192		)
Cash and cash equivalents at beginning of period	1,746			42			4,062			—			5,850
Cash and cash equivalents at end of period	$	1,384		$	71		$	3,203		$	—		$	4,658

Table of Contents

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

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

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

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

future refining segment margins, including gasoline and distillate margins;

future ethanol segment margins;

future renewable diesel segment margins;

expectations regarding feedstock costs, including crude oil differentials, and operating expenses;

anticipated levels of crude oil and refined petroleum product inventories;

our anticipated level of capital investments, including deferred costs for refinery turnarounds and catalyst, capital expenditures for environmental and other purposes, and joint venture investments, and the effect of those capital investments on our results of operations;

anticipated trends in the supply of and demand for crude oil and other feedstocks and refined petroleum products in the regions where we operate, as well as globally;

expectations regarding environmental, tax, and other regulatory initiatives; and

the effect of general economic and other conditions on refining, ethanol, and ~~midstream~~renewable diesel industry fundamentals.

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

acts of terrorism aimed at either our facilities or other facilities that could impair our ability to produce or transport refined petroleum products or receive feedstocks;

political and economic conditions in nations that produce crude oil or consume refined petroleum products;

demand for, and supplies of, refined petroleum products ~~such~~(such as gasoline, diesel, jet fuel, ~~petrochemicals,~~ and ~~ethanol;~~petrochemicals), ethanol, and renewable diesel;

demand for, and supplies of, crude oil and other feedstocks;

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, including seasonal fluctuations;

refinery overcapacity or undercapacity;

our ability to successfully integrate any acquired businesses into our operations;

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the actions taken by competitors, including both pricing and adjustments to refining capacity in response to market conditions;

the level of competitors’ imports into markets that we supply;

accidents, unscheduled shutdowns, or other catastrophes affecting our refineries, machinery, pipelines, equipment, and information systems, or those of our suppliers or customers;

changes in the cost or availability of transportation for feedstocks and refined petroleum products;

the price, availability, and acceptance of alternative fuels and alternative-fuel vehicles;

the levels of government subsidies for alternative fuels;

the volatility in the market price of biofuel credits (primarily RINs needed to comply with the U.S. federal Renewable Fuel Standard) and GHG emission credits needed to comply with the requirements of various GHG emission programs;

delay of, cancellation of, or failure to implement planned capital projects and realize the various assumptions and benefits projected for such projects or cost overruns in constructing such planned capital projects;

earthquakes, hurricanes, tornadoes, and irregular weather, which can unforeseeably affect the price or availability of natural gas, crude oil, grain and other feedstocks, ~~and~~ refined petroleum products, ethanol, and ~~ethanol;~~renewable diesel;

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, including tariffs and tax and environmental regulations, such as those implemented under the California cap-and-trade system (also known as AB 32)~~, the Quebec cap-and-trade system, the Ontario cap-and-trade system,~~ and similar programs, and the U.S. EPA’s regulation of GHGs, which may adversely affect our business or operations;

changes in the credit ratings assigned to our debt securities and trade credit;

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;

overall economic conditions, including the stability and liquidity of financial markets; and

other factors generally described in the “Risk Factors” section included in our annual report on Form 10-K for the year ended December 31, ~~2017~~2018 that is incorporated by reference herein.

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 suggested in any forward-looking statements. We do not intend to update these statements unless we are required by the securities laws to do so.

All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing. 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.

This Form 10-Q includes references to financial measures that are not defined under U.S.GAAP. These non-GAAP financial measures include adjusted net income attributable to Valero stockholders, ~~refining and ethanol segment margin, and~~ adjusted operating ~~income.~~income (including adjusted operating income for each of our reportable segments, as applicable), and refining, ethanol, and renewable diesel segment margin. We have included these non-GAAP financial measures to help facilitate the comparison of operating results between periods. See the accompanying financial tables in “RESULTS OF OPERATIONS” and note ~~(g)~~(c) to the accompanying tables for reconciliations of these non-GAAP financial measures to the most directly comparable U.S. GAAP financial

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measures. Also in note ~~(g)~~(c),

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we disclose the reasons why we believe our use of the non-GAAP financial measures provides useful information.

OVERVIEW AND OUTLOOK

Overview

~~Second Quarter Results~~

For the ~~second~~first quarter of ~~2018,~~2019, we reported net income attributable to Valero stockholders of ~~$845~~$141 million compared to ~~$548~~$469 million for the ~~second~~first quarter of ~~2017,~~2018, which represents a decrease of $328 million. This decrease is primarily due to a $415 million decrease in net income, partially offset by an ~~increase of $297 million. Excluding the adjustments to~~$87 million decrease in net income attributable to ~~Valero stockholders reflected~~noncontrolling interests. The decrease in ~~the table on page 40, adjusted~~ net income attributable to ~~Valero stockholders was $928 million for the second quarter of 2018, an increase of $380 million compared to the second quarter of 2017. This increase~~noncontrolling interests is primarily due to ~~higher~~the recognition of a blender’s tax credit in the first quarter of 2018 of which $80 million is attributable to the holder of the noncontrolling interest, as described in note (a) to the accompanying tables. The decrease in net income was primarily driven by a decrease in operating income between the periods, net of the resulting ~~increase~~decrease in income tax ~~expense.~~expense, as described below.

Operating income ~~was $1.3 billion~~ for the ~~second~~first quarter of 2019 was $308 million compared to $801 million for the first quarter of 2018, ~~compared to $860 million for the second quarter of 2017,~~ which represents ~~an increase~~a decrease of ~~$393~~$493 million. Excluding the adjustments to operating income reflected in the ~~table~~tables on page ~~40,~~47, adjusted operating income ~~for~~decreased $383 million in the ~~second~~first quarter of ~~2018 was $1.3 billion, an increase of $470 million~~2019 compared to the ~~second~~first quarter of ~~2017.~~2018.

The ~~$470~~$383 million ~~increase~~decrease in adjusted operating incomeis primarily due to the following:


•	Refining segment. Refining segment adjusted operating income decreased by $330 million primarily due to lower gasoline margins, partially offset by higher crude oil discounts and lower cost of biofuel credits. This is more fully described on pages 53 through 55.


•	Ethanol segment. Ethanol segment operating income decreased by $42 million primarily due to lower ethanol prices coupled with higher corn prices. This is more fully described on pages 55 and 56.

~~Refining segment.~~ Refining segment adjusted operating income increased by $463 million primarily due to improved distillate margins and stronger crude oil discounts, partially offset by lower gasoline margins and lower throughput volumes. This is more fully described on pages 44 through 46.


•	Renewable diesel segment. Renewable diesel segment adjusted operating income increased by $14 million primarily due to higher sales volumes, partially offset by hedge losses on commodity derivative instruments associated with our price risk management activities and lower co-product prices. This is more fully described on page 56.


•	Corporate and eliminations. Adjusted corporate and eliminations increased by $25 million primarily due to expenses in the first quarter of 2019 associated with the Merger Transaction with VLP, an increase in legal reserves, and higher employee related expenses. This is more fully described on page 57.

~~Ethanol segment.~~ ~~Ethanol segment operating income increased by $12 million primarily due to higher corn related co-product prices, partially offset by lower ethanol prices. This is more fully described on page 46.~~

~~VLP segment.~~ VLP segment operating income increased by $12 million primarily due to incremental revenues, partially offset by higher cost of sales, generated from transportation and terminaling activities associated with a terminal and a product pipeline system acquired by VLP in November 2017 that were formerly a part of the refining segment. This is more fully described on page 47.

~~Corporate and eliminations.~~ ~~Adjusted corporate and eliminations increased by $17 million primarily due to an increase in employee related expenses. This is more fully described on page 47.~~

~~First Six Months Results~~

For the first six months of 2018, we reported net income attributable to Valero stockholders of $1.3 billion compared to $853 million for the first six months of 2017, which represents an increase of $461 million. Excluding the adjustments to net income attributable to Valero stockholders reflected in the table on page 50, adjusted net income attributable to Valero stockholders was $1.4 billion for the first six months of 2018, an increase of $506 million compared to the first six months of 2017. This increase is primarily due to higher operating income between the periods, net of the resulting increase in income tax expense.

Operating income was $2.1 billion for the first six months of 2018 compared to $1.4 billion for the first six months of 2017, which represents an increase of $666 million. Excluding the adjustments to operating income

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~~reflected in the table on page 50, adjusted operating income for the first six months of 2018 was $2.0 billion, an increase of $635 million compared to the first six months of 2017.~~

~~The $635 million increase in adjusted operating incomeis primarily due to the following:~~

~~Refining segment.~~ Refining segment adjusted operating income increased by $585 million primarily due to improved distillate margins and stronger discounts on crude oils and other feedstocks, partially offset by lower gasoline and other products margins. This is more fully described on pages 56 through 58.

~~Ethanol segment.~~ Ethanol segment operating income increased by $35 million primarily due to higher corn related co-product prices, partially offset by lower ethanol prices. This is more fully described on pages 58 and 59.

~~VLP segment.~~ VLP segment operating income increased by $26 million primarily due to incremental revenues, partially offset by higher cost of sales, generated from transportation and terminaling activities associated with a terminal and a product pipeline system acquired by VLP in November 2017 that were formerly a part of the refining segment. This is more fully described on page 59.

~~Corporate and eliminations.~~ ~~Adjusted corporate and eliminations increased by $11 million primarily due to an increase in employee related expenses. This is more fully described on page 59.~~

Outlook

Below are several factors that have impacted or may impact our results of operations during the ~~third~~second quarter of ~~2018:~~2019:

~~Refined product~~Gasoline margins are expected to improve as demand strengthens with the upcoming summer driving season. Distillate margins are expected to remain near current ~~levels as domestic and export demand remains strong.~~levels.

Medium and heavy sour crude oil discounts are expected to remain weaker than their five-year averages as supplies of sour crude oils available in the market remain suppressed.

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Sweet crude oil discounts are expected to ~~remain near current levels~~narrow slightly as U.S. Gulf Coast refiners increase sweet crude oil consumption to offset the loss of medium and heavy sour crude oil supply while export demand for sweet crude oil remains ~~strong~~strong. Inland sweet crude oil differentials are expected to remain wide with higher production and ~~increased supplies from~~limited pipeline capacity to transport crude oil out of the Permian Basin ~~are delivered into U.S. Gulf Coast markets.~~and other producing regions; however, these differentials will likely experience increased volatility as the announced start-up or potential delay of new pipeline capacity influences short-term market dynamics.

Ethanol margins are expected to improve as domestic gasoline demand strengthens.

Renewable diesel margins are expected to remain ~~near~~consistent with current levels.

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RESULTS OF OPERATIONS

The following tables highlight our results of operations, our operating performance, and market reference prices that directly impact our operations. In addition, these tables include financial measures that are not defined under U.S. GAAP and represent non-GAAP financial measures. These non-GAAP financial measures are reconciled to their most comparable U.S. GAAP financial measures and include adjusted net income attributable to Valero Energy Corporation stockholders, adjusted operating income (including adjusted operating income for each of our reportable segments, as applicable), and refining, ethanol, and ~~ethanol~~renewable diesel segment margin. In note ~~(g)~~(c) to these tables, we disclose the reasons why we believe our use of non-GAAP financial measures provides useful information.

Effective January 1, 2019, we revised our reportable segments to align with certain changes in how our chief operating decision maker manages and allocates resources to our business. Accordingly, we created a new reportable segment — renewable diesel — because of the growing importance of renewable fuels in the market and the growth of our investments in renewable fuels production. The renewable diesel segment includes the operations of DGD, which were transferred from the refining segment on January 1, 2019. Also effective January 1, 2019, we no longer have a VLP segment, and we include the operations of VLP in our refining segment. This change was made because of the Merger Transaction with VLP, as described in Note 2 of Condensed Notes to Consolidated Financial Statements, and the resulting change in how we manage VLP’s operations. We no longer manage VLP as a business but as logistics assets that support the operations of our refining segment. Our prior period segment information has been retrospectively adjusted to reflect our current segment presentation.

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~~Second Quarter Results -~~

Financial Highlights By Segment and Total Company

(millions of dollars)


	Three Months Ended June 30, 2018												Three Months Ended March 31, 2019
	Refining		Ethanol		VLP		Corporate and Eliminations			Total			Refining		Ethanol		Renewable Diesel		Corporate and Eliminations			Total
Revenues:
Revenues from external customers	$	30,130	$	884	$	—	$	1		$	31,015		$	23,218	$	793	$	252	$	—		$	24,263
Intersegment revenues	1		42		135		(178		)	—			2		52		51		(105		)	—
Total revenues	30,131		926		135		(177		)	31,015			23,220		845		303		(105		)	24,263
Cost of sales:
Cost of materials and other	27,283		754		—		(177		)	27,860			21,165		694		224		(105		)	21,978
Operating expenses (excluding depreciation and amortization expense reflected below)	969		109		33		(1		)	1,110			1,071		125		19		—			1,215
Depreciation and amortization expense	471		20		19		—			510			503		23		11		—			537
Total cost of sales	28,723		883		52		(178		)	29,480			22,739		842		254		(105		)	23,730
Other operating expenses ~~(c)~~	21		—		—		—			21			2		—		—		—			2
General and administrative expenses (excluding depreciation and amortization expense reflected below) ~~(d)~~	—		—		—		248			248			—		—		—		209			209
Depreciation and amortization expense	—		—		—		13			13			—		—		—		14			14
Operating income by segment	$	1,387	$	43	$	83	$	(260	)	1,253			$	479	$	3	$	49	$	(223	)	308
Other income (expense), net (e)										(5		)
Other income, net																						22
Interest and debt expense, net of capitalized interest										(124		)										(112		)
Income before income tax expense										1,124												218
Income tax expense ~~(f)~~										249												51
Net income										875												167
Less: Net income attributable to noncontrolling interests										30												26
Net income attributable to Valero Energy Corporation stockholders										$	845											$	141

~~___________________~~

~~See note references on pages 54 through 56.~~

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~~Second Quarter Results -~~

Financial Highlights By Segment and Total Company (continued)

(millions of dollars)


	Three Months Ended June 30, 2017												Three Months Ended March 31, 2018
	Refining		Ethanol		VLP		Corporate and Eliminations			Total			Refining		Ethanol		Renewable Diesel			Corporate and Eliminations			Total
Revenues:
Revenues from external customers	$	21,415	$	839	$	—	$	—		$	22,254		$	25,453	$	877	$	108		$	1		$	26,439
Intersegment revenues	—		28		110		(138		)	—			4		46		42			(92		)	—
Total revenues	21,415		867		110		(138		)	22,254			25,457		923		150			(91		)	26,439
Cost of sales:
Cost of materials and other(a)	19,037		710		—		(138		)	19,609			23,164		749		(65		)	(92		)	23,756
Operating expenses (excluding depreciation and amortization expense reflected below) ~~(b)~~	979		107		27		(2		)	1,111			1,011		111		14			—			1,136
Depreciation and amortization expense	454		19		12		—			485			461		18		6			—			485
Total cost of sales	20,470		836		39		(140		)	21,205			24,636		878		(45		)	(92		)	25,377
Other operating expenses													10		—		—			—			10
General and administrative expenses (excluding depreciation and amortization expense reflected below) (b)	—		—		—		175			175			—		—		—			238			238
Depreciation and amortization expense	—		—		—		14			14			—		—		—			13			13
Operating income by segment	$	945	$	31	$	71	$	(187	)	860			$	811	$	45	$	195		$	(250	)	801
Other income, net (b)										27
Other income, net																							51
Interest and debt expense, net of capitalized interest										(119		)											(121		)
Income before income tax expense										768													731
Income tax expense										196													149
Net income										572													582
Less: Net income attributable to noncontrolling interests										24
Less: Net income attributable to noncontrolling interests (a)																							113
Net income attributable to Valero Energy Corporation stockholders										$	548												$	469

___________________

See note references on pages 5451 through ~~56.~~53.

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~~Second Quarter Results -~~

Financial Highlights By Segment and Total Company (continued)

(millions of dollars)

Three Months Ended June 30,
2018 2017
Reconciliation of net income attributable to Valero Energy
Corporation stockholders to adjusted net income attributable to
Valero Energy Corporation stockholders (g)

Net income attributable to Valero Energy Corporation stockholders $ 845
$ 548
Exclude adjustments:
Texas City Refinery fire expenses (c) (14 ) —
Income tax benefit related to Texas City Refinery fire expenses 3
—
Texas City Refinery fire expenses, net of taxes (11 ) —
Environmental reserve adjustment (d) (56 ) —
Income tax benefit related to the environmental reserve adjustment 13
—
Environmental reserve adjustment, net of taxes (43 ) —
Loss on early redemption of debt (e) (38 ) —
Income tax benefit related to the loss on early redemption of debt 9
—
Loss on early redemption of debt, net of taxes (29 ) —
Total adjustments (83 ) —
Adjusted net income attributable to
Valero Energy Corporation stockholders
$ 928
$ 548

Three Months Ended June 30, 2018
Refining Ethanol VLP
Corporate
and
Eliminations
Total
Reconciliation of operating income to adjusted
operating income (g)

Operating income by segment (see page 38) $ 1,387
$ 43
$ 83
$ (260 ) $ 1,253
Exclude:
Other operating expenses (c) (21 ) —
—
—
(21 )
Environmental reserve adjustment (d) —
—
—
(56 ) (56 )
Adjusted operating income $ 1,408
$ 43
$ 83
$ (204 ) $ 1,330

~~There were no adjustments to operating income for the second quarter of 2017. See operating income by segment for the second quarter of 2017 on page 39.~~



	Three Months Ended March 31,
	2019		2018
Reconciliation of net income attributable to Valero Energy Corporation stockholders to adjusted net income attributable to Valero Energy Corporation stockholders (c)
Net income attributable to Valero Energy Corporation stockholders	$	141	$	469
Exclude adjustments:
2017 blender’s tax credit attributable to Valero Energy Corporation stockholders (a)	—		90
Income tax expense related to the 2017 blender’s tax credit	—		(11		)
2017 blender’s tax credit attributable to Valero Energy Corporation stockholders, net of taxes	—		79
Environmental reserve adjustment (b)	—		(52		)
Income tax benefit related to environmental reserve adjustment	—		11
Environmental reserve adjustment, net of taxes	—		(41		)
Total adjustments	—		38
Adjusted net income attributable to Valero Energy Corporation stockholders	$	141	$	431

___________________

See note references on pages 5451 through ~~56.~~53.

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~~Second Quarter Results -~~Financial Highlights By Segment and Total Company (continued)

(millions of dollars)



	Three Months Ended March 31, 2019
	Refining			Ethanol		Renewable Diesel		Corporate and Eliminations			Total
Reconciliation of operating income to adjusted operating income (c)
Operating income by segment (see page 44)	$	479		$	3	$	49	$	(223	)	$	308
Exclude:
Other operating expenses	(2		)	—		—		—			(2		)
Adjusted operating income	$	481		$	3	$	49	$	(223	)	$	310



	Three Months Ended March 31, 2018
	Refining			Ethanol		Renewable Diesel		Corporate and Eliminations			Total
Reconciliation of operating income to adjusted operating income (c)
Operating income by segment (see page 45)	$	811		$	45	$	195	$	(250	)	$	801
Exclude:
Other operating expenses	(10		)	—		—		—			(10		)
2017 blender’s tax credit (a)	10			—		160		—			170
Environmental reserve adjustment (b)	—			—		—		(52		)	(52		)
Adjusted operating income	$	811		$	45	$	35	$	(198	)	$	693

___________________

See note references on pages 51 through 53.

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Refining Segment Operating Highlights

(millions of dollars, except per barrel amounts)


	Three Months Ended June 30,							Three Months Ended March 31,
	2018		2017		Change			2019		2018		Change
Throughput volumes (thousand barrels per day (BPD))
Feedstocks:
Heavy sour crude oil	482		517		(35		)	410		482		(72		)
Medium/light sour crude oil	434		508		(74		)	338		408		(70		)
Sweet crude oil	1,303		1,308		(5		)	1,476		1,344		132
Residuals	231		228		3			145		222		(77		)
Other feedstocks	121		142		(21		)	153		119		34
Total feedstocks	2,571		2,703		(132		)	2,522		2,575		(53		)
Blendstocks and other	327		316		11			343		356		(13		)
Total throughput volumes	2,898		3,019		(121		)	2,865		2,931		(66		)

Yields (thousand BPD)
Gasolines and blendstocks	1,407		1,458		(51		)	1,397		1,401		(4		)
Distillates	1,096		1,167		(71		)	1,089		1,109		(20		)
Other products ~~(h)~~(d)	434		434		—			406		458		(52		)
Total yields	2,937		3,059		(122		)	2,892		2,968		(76		)

Operating statistics ~~(i)~~(e)
Refining margin ~~(g)~~(c)	$	2,848	$	2,378	$	470		$	2,055	$	2,283	$	(228	)
Adjusted refining operating income (see page 40) (g)	$	1,408	$	945	$	463
Adjusted refining operating income (see page 47) (c)								$	481	$	811	$	(330	)
Throughput volumes (thousand BPD)	2,898		3,019		(121		)	2,865		2,931		(66		)

Refining margin per barrel of throughput	$	10.80	$	8.66	$	2.14		$	7.97	$	8.65	$	(0.68	)
Less:
Operating expenses (excluding depreciation and amortization expense reflected below) per barrel of throughput ~~(b)~~	3.67		3.56		0.11			4.15		3.83		0.32
Depreciation and amortization expense per barrel of throughput	1.79		1.66		0.13			1.96		1.74		0.22
Adjusted refining operating income per barrel of throughput	$	5.34	$	3.44	$	1.90		$	1.86	$	3.08	$	(1.22	)

___________________

See note references on pages 5451 through ~~56.~~53.

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~~Second Quarter Results -~~

Ethanol Segment Operating Highlights

(millions of dollars, except per gallon amounts)


	Three Months Ended June 30,							Three Months Ended March 31,
	2018		2017		Change			2019		2018		Change
Operating statistics ~~(i)~~(e)
Ethanol margin ~~(g)~~(c)	$	172	$	157	$	15		$	151	$	174	$	(23	)
Ethanol operating income	$	43	$	31	$	12		$	3	$	45	$	(42	)
Production volumes (thousand gallons per day)	4,002		3,775		227			4,217		4,113		104

Ethanol margin per gallon of production	$	0.47	$	0.46	$	0.01		$	0.40	$	0.47	$	(0.07	)
Less:
Operating expenses (excluding depreciation and amortization expense reflected below) per gallon of production	0.30		0.31		(0.01		)	0.33		0.30		0.03
Depreciation and amortization expense per gallon of production	0.05		0.06		(0.01		)	0.06		0.05		0.01
Ethanol operating income per gallon of production	$	0.12	$	0.09	$	0.03		$	0.01	$	0.12	$	(0.11	)

~~Second Quarter Results -~~

~~VLP~~Renewable Diesel Segment Operating Highlights

(millions of dollars, except per ~~barrel~~gallon amounts)

Three Months Ended June 30,
2018 2017 Change
Operating statistics (i)
Pipeline transportation revenue $ 31
$ 25
$ 6
Terminaling revenue 103
84
19
Storage and other revenue 1
1
—
Total VLP revenues $ 135
$ 110
$ 25

Pipeline transportation throughput (thousand BPD) 1,033
1,003
30
Pipeline transportation revenue per barrel of throughput $ 0.32
$ 0.27
$ 0.05

Terminaling throughput (thousand BPD) 3,562
2,853
709
Terminaling revenue per barrel of throughput $ 0.32
$ 0.33
$ (0.01 )



	Three Months Ended March 31,
	2019		2018		Change
Operating statistics (e)
Renewable diesel margin (c)	$	79	$	55	$	24
Adjusted renewable diesel operating income	$	49	$	35	$	14
Sales volumes (thousand gallons per day)	790		371		419

Renewable diesel margin per gallon of sales	$	1.11	$	1.64	$	(0.53	)
Less:
Operating expenses (excluding depreciation and amortization expense reflected below) per gallon of sales	0.26		0.43		(0.17		)
Depreciation and amortization expense per gallon of sales	0.16		0.19		(0.03		)
Adjusted renewable diesel operating income per gallon of sales	$	0.69	$	1.02	$	(0.33	)

___________________

See note references on pages 5451 through ~~56.~~53.

4249

Table of Contents

~~Second Quarter Results -~~

Average Market Reference Prices and Differentials

(dollars per barrel, except as noted)


	Three Months Ended June 30,								Three Months Ended March 31,
	2018			2017		Change			2019			2018			Change
Refining
Feedstocks (dollars per barrel)
Brent crude oil	$	74.93		$	50.91	$	24.02		$	63.82		$	67.16		$	(3.34	)
Brent less West Texas Intermediate (WTI) crude oil	6.93			2.67		4.26			8.94			4.29			4.65
Brent less Alaska North Slope (ANS) crude oil	0.83			0.22		0.61			(0.68		)	0.20			(0.88		)
Brent less Louisiana Light Sweet (LLS) crude oil	1.93			0.60		1.33			1.45			1.38			0.07
Brent less Argus Sour Crude Index (ASCI) crude oil	5.63			3.94		1.69			2.89			4.88			(1.99		)
Brent less Maya crude oil	12.90			7.03		5.87			5.04			9.46			(4.42		)
LLS crude oil	73.00			50.31		22.69			62.37			65.78			(3.41		)
LLS less ASCI crude oil	3.70			3.34		0.36			1.44			3.50			(2.06		)
LLS less Maya crude oil	10.97			6.43		4.54			3.59			8.08			(4.49		)
WTI crude oil	68.00			48.24		19.76			54.88			62.87			(7.99		)

Natural gas (dollars per million British Thermal Units (MMBtu))	2.89			3.14		(0.25		)	2.86			3.19			(0.33		)

Products (dollars per barrel, unless otherwise noted)
U.S. Gulf Coast:
Conventional Blendstock of Oxygenate Blending (CBOB) gasoline less Brent	7.47			10.38		(2.91		)	0.16			7.28			(7.12		)
Ultra-low-sulfur diesel less Brent	13.46			10.99		2.47
Ultra-low-sulfur (ULS) diesel less Brent									14.99			13.78			1.21
Propylene less Brent	(6.54		)	0.04		(6.58		)	(20.64		)	(6.82		)	(13.82		)
CBOB gasoline less LLS	9.40			10.98		(1.58		)	1.61			8.66			(7.05		)
Ultra-low-sulfur diesel less LLS	15.39			11.59		3.80
ULS diesel less LLS									16.44			15.16			1.28
Propylene less LLS	(4.61		)	0.64		(5.25		)	(19.19		)	(5.44		)	(13.75		)
U.S. Mid-Continent:
CBOB gasoline less WTI	16.05			14.16		1.89			9.69			13.47			(3.78		)
Ultra-low-sulfur diesel less WTI	22.02			14.60		7.42
ULS diesel less WTI									24.89			19.83			5.06
North Atlantic:
CBOB gasoline less Brent	10.37			12.57		(2.20		)	1.25			8.88			(7.63		)
Ultra-low-sulfur diesel less Brent	15.25			12.21		3.04
ULS diesel less Brent									17.43			15.95			1.48
U.S. West Coast:
California Reformulated Gasoline Blendstock of Oxygenate Blending (CARBOB) 87 gasoline less ANS	18.36			23.01		(4.65		)	7.73			13.27			(5.54		)
CARB diesel less ANS	18.70			14.32		4.38
California Air Resources Board (CARB) diesel less ANS									16.20			17.28			(1.08		)
CARBOB 87 gasoline less WTI	24.46			25.46		(1.00		)	17.35			17.36			(0.01		)
CARB diesel less WTI	24.80			16.77		8.03			25.82			21.37			4.45
New York Harbor corn crush (dollars per gallon)	0.17			0.26		(0.09		)

4350

Table of Contents

~~Total Company, Corporate, and Other~~

Revenues increased $8.8 billion in the second quarter of 2018 compared to the second quarter of 2017 primarily due to increases in refined petroleum product prices associated with our refining segment. This improvement in revenues was partially offset by higher cost of sales and general and administrative expenses (excluding depreciation and amortization expense) between the periods, resulting in an increase in operating income of $393 million in the second quarter of 2018 compared to the second quarter of 2017.

Excluding the adjustments to operating income for the second quarter of 2018 reflected in the table on page 40, adjusted operating income was $1.3 billion for the second quarter of 2018 compared to $860 million for the second quarter of 2017. Details regarding the $470 million increase in adjusted operating income between the periods are discussed by segment below.

Other income (expense), net decreased $32 million in the second quarter of 2018 compared to the second quarter of 2017 primarily due to a $38 million charge from the early redemption of debt, as more fully described in note (e) to the accompanying tables (see page 54), partially offset by higher equity in earnings associated with our Diamond Pipeline joint venture.

Income tax expense increased $53 million in the second quarter of 2018 compared to the second quarter of 2017 primarily as a result of higher income before income tax expense, partially offset by a decrease in our effective tax rate. Our effective tax rate was 22 percent for the second quarter of 2018 compared to 26 percent for the second quarter of 2017. The lower effective tax rate for the second quarter of 2018 is primarily due to the reduction in the U.S. statutory income tax rate from 35 percent to 21 percent effective January 1, 2018 as a result of Tax Reform, which is more fully described in Note 9 of Condensed Notes to Consolidated Financial Statements.

~~Refining Segment Results~~

Refining segment revenues increased $8.7 billion in the second quarter of 2018 compared to the second quarter of 2017 primarily due to increases in refined petroleum product prices. This improvement in refining segment revenues was partially offset by higher cost of sales between the periods, resulting in an increase in refining segment operating income of $442 million in the second quarter of 2018 compared to the second quarter of 2017.

Excluding the adjustments to refining segment operating income from the second quarter of 2018 reflected in the table on page 40, adjusted refining segment operating income was $1.4 billion for the second quarter of 2018, an increase of $463 million compared to the second quarter of 2017. This increase is primarily due to higher refining segment margin, as outlined below.

Refining segment margin, as defined in note (g) to the accompanying tables (see page 54), increased $470 million in the second quarter of 2018 compared to the second quarter of 2017, primarily due to the following:

~~Increase in distillate margins.~~ We experienced improved distillate margins throughout all of our regions during the second quarter of 2018 compared to the second quarter of 2017. For example, the Brent-based benchmark reference margin for U.S. Gulf Coast ultra-low-sulfur diesel was $13.46 per barrel for the second quarter of 2018 compared to $10.99 per barrel for the second quarter of 2017, representing a favorable increase of $2.47 per barrel. Another example is the WTI-based benchmark reference margin for U.S. Mid-Continent ultra-low-sulfur diesel which was $22.02 per barrel for the second quarter of 2018 compared to $14.60 per barrel for the second quarter of 2017, representing a favorable increase of $7.42 per barrel. We estimate that the increase in distillate

~~Table of Contents~~

~~margins per barrel in the second quarter of 2018 compared to the second quarter of 2017 had a favorable impact to our refining segment margin of approximately $413 million.~~

~~Higher discounts on crude oils.~~ The market prices for refined petroleum products generally track the price of Brent crude oil, which is a benchmark crude oil, and we benefit when we process crude oils that are priced at a discount to Brent crude oil. We benefitted from processing these types of crude oils during the second quarter of 2018 and that benefit improved compared to the second quarter of 2017. For example, Maya crude oil, a sour crude oil processed in our U.S. Gulf Coast region, sold at a discount to Brent crude oil of $12.90 per barrel for the second quarter of 2018 compared to a discount of $7.03 per barrel for the second quarter of 2017, representing a favorable increase of $5.87 per barrel. Another example is WTI crude oil, a light sweet crude oil processed in our U.S. Mid-Continent region, which sold at a discount of $6.93 per barrel for the second quarter of 2018 compared to a discount of $2.67 per barrel for the second quarter of 2017, representing a favorable increase of $4.26 per barrel. We estimate that the increase in the discounts for the crude oils we processed during the second quarter of 2018 compared to the second quarter of 2017 had a favorable impact to our refining segment margin of approximately $325 million.

~~Higher discounts on other feedstocks.~~ In addition to crude oil, we utilize other feedstocks, such as natural gas and residuals, in certain of our refining processes. We benefit when we process these other feedstocks that are priced at a discount to Brent crude oil. We benefitted from processing these types of feedstocks during the second quarter of 2018 and that benefit improved compared to the second quarter of 2017. We estimate that the increase in the discounts for the other feedstocks we processed during the second quarter of 2018 compared to the second quarter of 2017 had a favorable impact to our refining segment margin of approximately $181 million.

~~Lower costs of biofuel credits.~~ ~~As more fully described in~~ ~~Note 14~~ of Condensed Notes to Consolidated Financial Statements, we must purchase biofuel credits in order to meet our biofuel blending obligation under various government and regulatory compliance programs, and the cost of these credits (primarily RINs in the U.S.) decreased by $124 million to $131 million for the second quarter of 2018 compared to $255 million for the second quarter of 2017.

~~Decrease in other products margins.~~ We experienced a decrease in the margins of other products (such as petroleum coke and sulfur) relative to Brent crude oil during the second quarter of 2018 compared to the second quarter of 2017 due to an increase in the cost of crude oils between the periods. Because the market prices for our other products remain relatively stable, our margins decline when the cost of crude oils that we process increases. For example, the benchmark price of Brent crude oil was $74.93 per barrel for the second quarter of 2018 compared to $50.91 per barrel for the second quarter of 2017, representing an unfavorable increase of $24.02 per barrel. We estimate that the decrease in other products margins in the second quarter of 2018 compared to the second quarter of 2017 had an unfavorable impact to our refining segment margin of approximately $259 million.

~~Decrease in gasoline margins.~~ We experienced a decrease in gasoline margins during the second quarter of 2018 compared to the second quarter of 2017. For example, the Brent-based benchmark reference margin for U.S. Gulf Coast CBOB gasoline was $7.47 per barrel for the second quarter of 2018 compared to $10.38 per barrel for the second quarter of 2017, representing an unfavorable decrease of $2.91 per barrel. Another example is the ANS-based benchmark reference margin for U.S. West Coast CARBOB 87 gasoline which was $18.36 per barrel for the second quarter of 2018 compared to $23.01 per barrel for the second quarter of 2017, representing an unfavorable decrease

~~Table of Contents~~

of $4.65 per barrel. We estimate that the decrease in gasoline margins per barrel in the second quarter of 2018 compared to the second quarter of 2017 had an unfavorable impact to our refining segment margin of approximately $133 million.

~~Lower throughput volumes.~~ Refining throughput volumes decreased by 121,000 BPD in the second quarter of 2018 primarily due to maintenance in the U.S. Gulf Coast and North Atlantic regions. We estimate that the decrease in refining throughput volumes had a negative impact on our refining segment margin of approximately $119 million.

~~Increase in charges from VLP.~~ Charges from the VLP segment for transportation and terminaling services increased $25 million in the second quarter of 2018 compared to the second quarter of 2017 primarily due to additional services provided by a terminal and a product pipeline system acquired by VLP in November 2017 that were formerly a part of the refining segment. The increase in charges from the VLP segment is more fully discussed in the VLP segment analysis below.

~~Ethanol Segment Results~~

Ethanol segment revenues increased $59 million in the second quarter of 2018 compared to the second quarter of 2017 primarily due to increases in corn related co-product prices. This improvement in ethanol segment revenues was partially offset by higher cost of sales between the periods, resulting in an increase in ethanol segment operating income of $12 million in the second quarter of 2018 compared to the second quarter of 2017. This increase is primarily due to higher ethanol segment margins, as outlined below.

Ethanol segment margin, as defined in note (g) to the accompanying tables (see page 54), increased $15 million in the second quarter of 2018 compared to the second quarter of 2017, primarily due to the following:

~~Higher co-product prices.~~ An increase in export demand for corn related co-products, primarily distillers grains, had a favorable effect on the prices we received. We estimate that the increase in corn related co-product prices had a favorable impact to our ethanol segment margin of approximately $41 million.

~~Higher production volumes.~~ Ethanol segment margin was favorably impacted by increased production volumes of 227,000 gallons per day in the second quarter of 2018 compared to the second quarter of 2017 primarily due to reliability improvements. We estimate that the increase in production volumes had a favorable impact to our ethanol segment margin of approximately $9 million.

~~Lower ethanol prices~~. Ethanol prices were lower in the second quarter of 2018 compared to the second quarter of 2017 primarily due to a decrease in both export and domestic demand. For example, the New York Harbor ethanol price was $1.56 per gallon for the second quarter of 2018 compared to $1.59 per gallon for the second quarter of 2017, representing an unfavorable decrease of $0.03 per gallon. We estimate that the decrease in the price of ethanol had an unfavorable impact to our ethanol segment margin of approximately $25 million.

~~Higher corn prices~~. Corn prices were higher in the second quarter of 2018 compared to the second quarter of 2017. For example, the Chicago Board of Trade (CBOT) corn price was $3.83 per bushel for the second quarter of 2018 compared to $3.68 per bushel for the second quarter of 2017, representing an unfavorable increase of $0.15 per bushel. We estimate that the increase in the price of corn had an unfavorable impact to our ethanol segment margin of approximately $10 million.

~~Table of Contents~~

~~VLP Segment Results~~

VLP segment revenues increased $25 million in the second quarter of 2018 compared to the second quarter of 2017 primarily due to incremental revenues generated from transportation and terminaling services associated with assets acquired by VLP in November 2017 that were formerly a part of the refining segment. This increase in VLP segment revenues was partially offset by increases in other components of cost of sales, resulting in an increase in VLP segment operating income of $12 million in the second quarter of 2018 compared to the second quarter of 2017. The components of this increase, along with the reasons for the changes in these components, are discussed below.

VLP segment revenues increased $25 million in the second quarter of 2018, as previously noted, primarily due to incremental transportation and terminaling revenues from the Port Arthur terminal and Parkway pipeline, which VLP acquired from Valero in November 2017. The incremental revenues generated by these assets had a favorable impact to VLP segment revenues of $22 million.

VLP segment cost of sales increased $13 million primarily due to the costs to operate the Port Arthur terminal and the Parkway pipeline and depreciation expense associated with these assets. VLP acquired these assets in November 2017.

~~Corporate and Eliminations~~

Corporate and eliminations, which consists primarily of general and administrative expenses and related depreciation and amortization expense, increased by $73 million in the second quarter of 2018 compared to the second quarter of 2017. Excluding the environmental reserve adjustment of $56 million for the second quarter of 2018 reflected in the table on page 40, adjusted corporate and eliminations increased by $17 million primarily ~~due to an increase in employee-related expenses.~~

~~Table of Contents~~

~~First Six Months Results -~~

~~Financial Highlights By Segment and Total Company~~

~~(millions of dollars)~~

Six Months Ended June 30, 2018
Refining Ethanol VLP Corporate
and
Eliminations Total
Company
Revenues:
Revenues from external customers $ 55,691
$ 1,761
$ —
$ 2
$ 57,454
Intersegment revenues 5
88
267
(360 ) —
Total revenues 55,696
1,849
267
(358 ) 57,454
Cost of sales:
Cost of materials and other (a) 50,471
1,503
—
(358 ) 51,616
Operating expenses (excluding depreciation and
amortization expense reflected below)
1,966
220
62
(2 ) 2,246
Depreciation and amortization expense 919
38
38
—
995
Total cost of sales 53,356
1,761
100
(360 ) 54,857
Other operating expenses (c) 31
—
—
—
31
General and administrative expenses (excluding
depreciation and amortization expense reflected
below) (d)
—
—
—
486
486
Depreciation and amortization expense —
—
—
26
26
Operating income by segment $ 2,309
$ 88
$ 167
$ (510 ) 2,054
Other income, net (e) 46
Interest and debt expense, net of capitalized interest (245 )
Income before income tax expense 1,855
Income tax expense (f) 398
Net income 1,457
Less: Net income attributable to noncontrolling
interests (a)
143
Net income attributable to
Valero Energy Corporation stockholders
$ 1,314

~~___________________~~

~~See note references on pages 54 through 56.~~

~~Table of Contents~~

~~First Six Months Results -~~

~~Financial Highlights By Segment and Total Company (continued)~~

~~(millions of dollars)~~

Six Months Ended June 30, 2017
Refining Ethanol VLP Corporate
and
Eliminations Total
Company
Revenues:
Revenues from external customers $ 42,302
$ 1,724
$ —
$ —
$ 44,026
Intersegment revenues —
88
216
(304 ) —
Total revenues 42,302
1,812
216
(304 ) 44,026
Cost of sales:
Cost of materials and other 37,844
1,497
—
(304 ) 39,037
Operating expenses (excluding depreciation and
amortization expense reflected below) (b)
1,970
216
51
(2 ) 2,235
Depreciation and amortization expense 903
46
24
—
973
Total cost of sales 40,717

1,759
75
(306 ) 42,245
General and administrative expenses (excluding
depreciation and amortization expense reflected
below) (b)
—
—
—
367
367
Depreciation and amortization expense —
—
—
26
26
Operating income by segment $ 1,585
$ 53
$ 141
$ (391 ) 1,388
Other income, net (b) 53
Interest and debt expense, net of capitalized interest (240 )
Income before income tax expense 1,201
Income tax expense 308
Net income 893
Less: Net income attributable to noncontrolling
interests
40
Net income attributable to
Valero Energy Corporation stockholders
$ 853

~~___________________~~

~~See note references on pages 54 through 56.~~

~~Table of Contents~~

~~First Six Months Results -~~

~~Financial Highlights By Segment and Total Company (continued)~~

~~(millions of dollars)~~

Six Months Ended June 30,
2018 2017
Reconciliation of net income attributable to Valero Energy
Corporation stockholders to adjusted net income attributable to
Valero Energy Corporation stockholders (g)

Net income attributable to Valero Energy Corporation stockholders $ 1,314
$ 853
Exclude adjustments:
Blender’s tax credit attributable to Valero Energy Corporation
shareholders (a)
90
—
Income tax expense related to the blender’s tax credit (11 ) —
Blender’s tax credit attributable to Valero Energy Corporation
stockholders, net of taxes
79
—
Texas City Refinery fire expenses (c) (14 ) —
Income tax benefit related to Texas City Refinery fire expenses 3
—
Texas City Refinery fire expenses, net of taxes (11 ) —
Environmental reserve adjustment (d) (108 ) —
Income tax benefit related to the environmental reserve adjustment 24
—
Environmental reserve adjustment, net of taxes (84 ) —
Loss on early redemption of debt (e) (38 ) —
Income tax benefit related to the loss on early redemption of debt 9
—
Loss on early redemption of debt, net of taxes (29 ) —
Total adjustments (45 ) —
Adjusted net income attributable to
Valero Energy Corporation stockholders
$ 1,359
$ 853

Six Months Ended June 30, 2018
Refining Ethanol VLP Corporate
and
Eliminations Total
Company
Reconciliation of operating income to adjusted
operating income (g)

Operating income by segment (see page 48) $ 2,309
$ 88
$ 167
$ (510 ) $ 2,054
Exclude:
Blender’s tax credit (a) 170
—
—
—
170
Other operating expenses (c) (31 ) —
—
—
(31 )
Environmental reserve adjustment (d) —
—
—
(108 ) (108 )
Adjusted operating income $ 2,170
$ 88
$ 167
$ (402 ) $ 2,023

~~There were no adjustments to operating income for the first six months of 2017. See operating income by segment for the first six months of 2017 on page 49.~~

~~___________________~~

~~See note references on pages 54 through 56.~~

~~Table of Contents~~

~~First Six Months Results -~~

~~Refining Segment Operating Highlights~~

~~(millions of dollars, except per barrel amounts)~~

Six Months Ended June 30,
2018 2017 Change
Throughput volumes (thousand BPD)
Feedstocks:
Heavy sour crude oil 482
483
(1 )
Medium/light sour crude oil 421
482
(61 )
Sweet crude oil 1,323
1,277
46
Residuals 226
231
(5 )
Other feedstocks 121
145
(24 )
Total feedstocks 2,573
2,618
(45 )
Blendstocks and other 342
311
31
Total throughput volumes 2,915
2,929
(14 )

Yields (thousand BPD)
Gasolines and blendstocks 1,404
1,409
(5 )
Distillates 1,102
1,129
(27 )
Other products (h) 446
429
17
Total yields 2,952
2,967
(15 )

Operating statistics (i)
Refining margin (g) $ 5,055
$ 4,458
$ 597
Adjusted refining operating income (see page 50) (g) $ 2,170
$ 1,585
$ 585
Throughput volumes (thousand BPD) 2,915
2,929
(14 )

Refining margin per barrel of throughput $ 9.58
$ 8.41
$ 1.17
Less:
Operating expenses (excluding depreciation and
amortization expense reflected below) per barrel of throughput (b)
3.73
3.72
0.01
Depreciation and amortization expense per barrel of
throughput
1.74
1.70
0.04
Adjusted refining operating income per barrel of throughput $ 4.11
$ 2.99
$ 1.12

~~___________________~~

~~See note references on pages 54 through 56.~~

~~Table of Contents~~

~~First Six Months Results -~~

~~Ethanol Segment Operating Highlights~~

~~(millions of dollars, except per gallon amounts)~~

Six Months Ended June 30,
2018 2017 Change
Operating statistics (i)
Ethanol margin (g) $ 346
$ 315
$ 31
Ethanol operating income $ 88
$ 53
$ 35
Production volumes (thousand gallons per day) 4,057
3,908
149

Ethanol margin per gallon of production $ 0.47
$ 0.45
$ 0.02
Less:
Operating expenses (excluding depreciation and
amortization reflected below) per gallon of production
0.30
0.31
(0.01 )
Depreciation and amortization expense per gallon of
production
0.05
0.06
(0.01 )
Ethanol operating income per gallon of production $ 0.12
$ 0.08
$ 0.04

~~First Six Months Results -~~

~~VLP Segment Operating Highlights~~

~~(millions of dollars, except per barrel amounts)~~

Six Months Ended June 30,
2018 2017 Change
Operating statistics (i)
Pipeline transportation revenue 62
48
$ 14
Terminaling revenue 202
167
35
Storage and other revenue 3
1
2
Total VLP revenues $ 267
$ 216
$ 51

Pipeline transportation throughput (thousand BPD) 1,047
983
64
Pipeline transportation revenue per barrel of throughput $ 0.33
$ 0.27
$ 0.06

Terminaling throughput (thousand BPD) 3,479
2,794
685
Terminaling revenue per barrel of throughput $ 0.32
$ 0.33
$ (0.01 )

~~___________________~~

~~See note references on pages 54 through 56~~

~~Table of Contents~~

~~First Six Months Results -~~

Average Market Reference Prices and Differentials,

~~(dollars per barrel, except as noted)~~ (continued)

Six Months Ended June 30,
2018 2017 Change
Feedstocks (dollars per barrel)
Brent crude oil $ 71.05
$ 52.78
$ 18.27
Brent less WTI crude oil 5.61
2.74
2.87
Brent less ANS crude oil 0.52
0.52
—
Brent less LLS crude oil 1.66
0.86
0.80
Brent less ASCI crude oil 5.26
4.50
0.76
Brent less Maya crude oil 11.18
8.48
2.70
LLS crude oil 69.39
51.92
17.47
LLS less ASCI crude oil 3.60
3.64
(0.04 )
LLS less Maya crude oil 9.52
7.62
1.90
WTI crude oil 65.44
50.04
15.40

Natural gas (dollars per MMBtu) 3.04
3.05
(0.01 )

Products (dollars per barrel, unless otherwise noted)

U.S. Gulf Coast:

CBOB gasoline less Brent 7.38
9.58
(2.20 )
Ultra-low-sulfur diesel less Brent 13.62
11.06
2.56
Propylene less Brent (6.68 ) 0.63
(7.31 )
CBOB gasoline less LLS 9.04
10.44
(1.40 )
Ultra-low-sulfur diesel less LLS 15.28
11.92
3.36
Propylene less LLS (5.02 ) 1.49
(6.51 )
U.S. Mid-Continent:

CBOB gasoline less WTI 14.76
13.44
1.32
Ultra-low-sulfur diesel less WTI 20.93
14.30
6.63
North Atlantic:

CBOB gasoline less Brent 9.63
10.63
(1.00 )
Ultra-low-sulfur diesel less Brent 15.60
12.14
3.46
U.S. West Coast:

CARBOB 87 gasoline less ANS 15.82
19.89
(4.07 )
CARB diesel less ANS 17.99
14.58
3.41
CARBOB 87 gasoline less WTI 20.91
22.11
(1.20 )
CARB diesel less WTI 23.08
16.80
6.28
New York Harbor corn crush (dollars per gallon) 0.18
0.26
(0.08 )



	Three Months Ended March 31,
	2019		2018		Change
Ethanol
New York Harbor (NYH) corn crush (dollars per gallon)	$	0.09	$	0.19	$	(0.10	)
Chicago Board of Trade (CBOT) corn (dollars per bushel)	3.73		3.66		0.07
NYH Ethanol (dollars per gallon)	1.44		1.52		(0.08		)

Renewable diesel
New York Mercantile Exchange ULS diesel (dollars per gallon)	1.94		1.98		(0.04		)
Biodiesel Renewable Identification Number (RIN) (dollars per RIN)	0.51		0.78		(0.27		)
California Low-Carbon Fuel Standard (dollars per metric ton)	194.21		136.12		58.09
CBOT soybean oil (dollars per pound)	0.29		0.32		(0.03		)

~~Table of Contents~~

The following notes relate to references on pages3845 through ~~42 and 48 through 52.~~49.

(a)

Cost of materials and other for the ~~six~~three months ended ~~June 30,~~March31, 2018 includes a benefit of $170 million for the biodiesel blender’s tax credit attributable to volumes blended during 2017. The benefit was recognized in February 2018 because the U.S. legislation authorizing the credit was passed and signed into law in that month. ~~The~~Of the $170 million pre-tax benefit, is$10million and $160million are included in ~~the~~our refining ~~segment~~ and ~~includes~~renewable diesel segments, respectively, and consequently, $80million is attributable to noncontrolling interest and $90million is attributable to Valero Energy Corporation stockholders.

(b)

Effective January 1, 2018, we adopted the provisions of ASU No. 2017-07 which resulted in the reclassification of the non-service component of net periodic pension cost and net periodic postretirement benefit cost from operating expenses (excluding depreciation and amortization expense) and general and administrative expenses (excluding depreciation and amortization expense) to other income (expense), net. This resulted in an increase of $14 million and $21 million in operating expenses (excluding depreciation and amortization expense) and a decrease of $3 million and $1 million in general and administrative expenses (excluding depreciation and amortization expense) for the three and six months ended June 30, 2017, respectively.

~~(c)~~

Other operating expenses reflects expenses that are not associated with our cost of sales. Other operating expenses for the three and six months ended June 30, 2018 includes $14 million of costs to respond to and assess the damage caused by a fire in the alkylation unit at our Texas City Refinery on April 19, 2018. In addition, other operating expenses for the three and six months ended June 30, 2018 includes repair costs incurred at certain of our refineries due to damage associated with inclement weather events in 2018 and Hurricane Harvey in 2017.


~~(d)~~	General and administrative expenses (excluding depreciation and amortization expense) for the three ~~and six~~ months ended ~~June 30,~~March31, 2018 includes a charge of ~~$56~~$52 million ~~and $108 million, respectively,~~ for an environmental reserve adjustment associated with certain non-operating sites.


~~(e)~~(c)	Other income (expense), net for the three and six months ended June 30, 2018 includes a $38 million charge composed of the early redemption fee of $37 million on our 9.375 percent Senior Notes and the write-off of $1 million of unamortized debt issuance costs.


~~(f)~~	As a result of Tax Reform that was enacted on December 22, 2017, the U.S. statutory income tax rate was reduced from 35 percent to 21 percent. Therefore, earnings from our U.S. operations for the three and six months ended June 30, 2018 are now taxed at 21 percent, resulting in a lower effective tax rate compared to the three and six months ended June 30, 2017.


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

We have defined these non-GAAP measures and believe they are useful to the external users of our financial statements, including industry analysts, investors, lenders, and rating agencies. We believe these measures are useful to assess our ongoing financial performance because, when reconciled to their most comparable U.S.GAAP measures, they provide improved comparability between periods through the exclusion of certain items that we believe are not indicative of our core operating performance and that may obscure our underlying business results and trends. These non-GAAP measures should not be considered as alternatives to their most comparable U.S.GAAP measures nor should they be considered in isolation or as a substitute for an analysis of our results of operations as reported under U.S.GAAP. In addition, these non-GAAP measures may not be comparable to similarly titled measures used by other companies because we may define them differently, which diminishes their utility.

Non-GAAP measures are as follows:

◦

Adjusted net income attributable to Valero Energy Corporation stockholders is defined as net income attributable to Valero Energy Corporation stockholders excluding the items noted below, along with their related income tax effect. We have excluded these items because we believe that they are not indicative of our core operating performance ~~in 2018~~ and that their exclusion results in an important measure of our ongoing financial performance to better assess our underlying business results and trends. The basis for

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our belief with respect to each excluded item ~~is provided below.~~


▪	~~Blender’s tax credit –~~ ~~The blender’s tax credit~~ is ~~attributable to volumes blended during 2017 and is not related to 2018 activities, as described in note (a).~~provided below.


▪	~~Texas City Refinery fire expenses~~2017 blender’s tax credit attributable to Valero Energy Corporation stockholders –The costs incurred to respond to and assess the damage caused by the fire that occurred at the Texas City Refinery (see note (c)) are specific to that event and are not ongoing costs incurred in our operations.blender’s

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tax credit is attributable to volumes blended during 2017 and is not related to 2018 activities, see note (a).


▪	Environmental reserve adjustment – The environmental reserve adjustment is attributable to sites that were shut down by prior owners and subsequently acquired by us (referred to by us as non-operating sites), ~~as described in~~see note ~~(d)~~(b).


▪	~~Loss on early redemption of debt –~~ ~~The penalty and other expenses incurred in connection with the early redemption of our 9.375percent Senior Notes (see note (e)) are not associated with the ongoing costs of our borrowing and financing activities.~~


◦	Refining margin is defined as refining operating income excluding the 2017 blender’s tax credit (see note (a)), operating expenses (excluding depreciation and amortization expense), ~~other operating expenses, and~~ depreciation and amortization expense, and other operating expenses, as reflected below.


◦	Ethanol margin is defined as ethanol operating income excluding operating expenses (excluding depreciation and amortization expense) and depreciation and amortization expense, as reflected below.


◦	Renewable diesel margin is defined as renewable diesel operating income excluding the 2017 blender’s tax credit (see note (a)), operating expenses (excluding depreciation and amortization expense), and depreciation and amortization expense, as reflected below.



	Three Months Ended March 31, 2019
	Refining			Ethanol			Renewable Diesel
Reconciliation of operating income to segment margin
Operating income	$	479		$	3		$	49
Exclude:
Operating expenses (excluding depreciation and amortization expense reflected below)	(1,071		)	(125		)	(19		)
Depreciation and amortization expense	(503		)	(23		)	(11		)
Other operating expenses	(2		)	—			—
Segment margin	$	2,055		$	151		$	79



	Three Months Ended March 31, 2018
	Refining			Ethanol			Renewable Diesel
Reconciliation of operating income to segment margin
Operating income	$	811		$	45		$	195
Exclude:
2017 blender’s tax credit	10			—			160
Operating expenses (excluding depreciation and amortization expense reflected below)	(1,011		)	(111		)	(14		)
Depreciation and amortization expense	(461		)	(18		)	(6		)
Other operating expenses	(10		)	—			—
Segment margin	$	2,283		$	174		$	55

Three Months Ended June 30,
2018 2017
Refining Ethanol Refining Ethanol
Reconciliation of operating income
to segment margin

Operating income $ 1,387
$ 43
$ 945
$ 31
Exclude:
Operating expenses (excluding depreciation
and amortization expense reflected below) (b)
(969 ) (109 ) (979 ) (107 )
Depreciation and amortization expense (471 ) (20 ) (454 ) (19 )
Other operating expenses (c) (21 ) —
—
—
Segment margin $ 2,848
$ 172
$ 2,378
$ 157

Six Months Ended June 30,
2018 2017
Refining Ethanol Refining Ethanol
Reconciliation of operating income
to segment margin

Operating income $ 2,309
$ 88
$ 1,585
$ 53
Exclude:
Blender’s tax credit (a) 170
—
—
—
Operating expenses (excluding depreciation
and amortization expense reflected below) (b)
(1,966 ) (220 ) (1,970 ) (216 )
Depreciation and amortization expense (919 ) (38 ) (903 ) (46 )
Other operating expenses (c) (31 ) —
—
—
Segment margin $ 5,055
$ 346
$ 4,458
$ 315


◦	Adjusted refining operating income is defined as refining segment operating income excluding the 2017 blender’s tax credit received in 2018 (see note (a)) and other operating expenses.

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◦	Adjusted renewable diesel operating income is defined as renewable diesel operating income excluding the 2017 blender’s tax credit (see note (a)).


◦	Adjusted corporate and eliminations is defined as corporate and eliminations excluding the environmental reserve adjustment associated with certain non-operating sites (see note ~~(d)~~(b)).


~~(h)~~(d)	Other products primarily ~~include~~includes petrochemicals, gas oils, No. 6 fuel oil, petroleum coke, sulfur, and asphalt.

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~~(i)~~(e)	Valero uses certain operating statistics (as noted below) to evaluate performance between comparable periods. Different companies may calculate them in different ways.

~~All~~Refining segment margin per barrel of throughput and adjusted refining segment operating income per barrel of throughput represents refining segment margin and adjusted refining segment operating income (each as defined in note (c) above) divided by throughput volumes. Ethanol segment margin per gallon of production ~~amounts are calculated~~and ethanol segment operating income per gallon of production represent ethanol segment margin (as defined in note (c) above) and ethanol segment operating income divided by ~~dividing the associated dollar amount~~production volumes. Renewable diesel segment margin per gallon of sales and adjusted renewable diesel segment operating income per gallon of sales represent renewable diesel segment margin and adjusted renewable diesel segment operating income (each as defined in note (c) above) divided by ~~the throughput volumes, production volumes, pipeline transportation throughput volumes, or terminaling throughput volumes for the period, as applicable.~~sales volumes.

Throughput, ~~volumes,~~ production, ~~volumes, pipeline transportation throughput volumes,~~ and ~~terminaling throughput~~sales volumes are calculated by multiplying throughput, production, and sales volumes per day ~~production volumes per day, pipeline transportation throughput volumes per day, and terminaling throughput volumes per day, respectively,~~(as provided in the accompanying tables) by the number of days in the applicable period. We use throughput volumes, production volumes, and sales volumes for the refining segment, ethanol segment, and renewable diesel segment, respectively, due to their general use by others who operate facilities similar to those included in our segments. We believe the use of such volumes results in per unit amounts that are most representative of the product margins generated and the operating costs incurred as a result of our operation of those facilities.

Total Company, Corporate, and Other

Revenues ~~increased $13.4~~decreased $2.2 billion in the first ~~six months~~quarter of ~~2018~~2019 compared to the first ~~six months~~quarter of ~~2017~~2018 primarily due to ~~increases~~decreases in refined petroleum product prices associated with sales made by our refining segment. This ~~improvement~~decline in revenues was partially offset by ~~higher~~lower cost of sales of $1.6 billion primarily due to decreases in crude oil and other feedstock costs and a decrease of $29 million in general and administrative expenses (excluding depreciation and amortization expense) ~~between the periods,~~, resulting in ~~an increase~~a decrease in operating income of ~~$666~~$493 million in the first ~~six months~~quarter of ~~2018~~2019 compared to the first ~~six months~~quarter of ~~2017.~~2018.

Excluding the adjustments to operating income ~~for the first six months of 2018~~ reflected in the ~~table~~tables on page ~~50,~~47, adjusted operating income ~~was $2.0 billion for~~decreased by $383 million in the first ~~six months~~quarter of ~~2018~~2019 compared to ~~$1.4 billion for~~ the first ~~six months~~quarter of ~~2017.~~2018. Details regarding the ~~$635~~$383 million ~~increase~~decrease in adjusted operating income between the periods are discussed by segment below.

“Other income, ~~(expense), net~~net” decreased $7$29 million in the first ~~six months~~quarter of ~~2018~~2019 compared to the first ~~six months~~quarter of ~~2017~~2018 primarily due to ~~a $38~~foreign currency transaction losses of $13 million ~~charge from the early redemption~~and lower interest income of ~~debt as more fully described in note (e) to the accompanying tables (see page 54), partially offset by higher equity in earnings associated with our Diamond Pipeline joint venture.~~$7 million.

Income tax expense ~~increased $90~~decreased $98 million in the first ~~six months~~quarter of ~~2018~~2019 compared to the first ~~six months~~quarter of ~~2017~~2018 primarily as a result of ~~higher~~lower income before income tax ~~expense, partially offset by a decrease in our effective tax rate.~~expense. Our effective tax rate was 2123 percent for the first ~~six months~~quarter of ~~2018~~2019 compared to 2620 percent for the first ~~six months~~quarter of ~~2017. The lower~~2018. Excluding the tax benefit related to the 2017 blender’s tax credit recognized in early 2018, the effective tax rate was 22 percent for the first ~~six months~~quarter of 2018 is primarily due to the reduction in the U.S. statutory income tax rate from 35 percent to 21 percent effective January 1, 2018 as a result of Tax Reform, which is more fully described in Note 9 of Condensed Notes to Consolidated Financial Statements.2018.

Net income attributable to ~~non-controlling~~noncontrolling interests ~~increased by $103~~decreased $87 million in the first ~~six months~~quarter of ~~2018~~2019 compared to the first ~~six months~~quarter of ~~2017~~2018 primarily due to ~~a benefit~~the recognition of ~~$80 million for the~~a blender’s tax credit in the first quarter of 2018 of which $80 million is attributable to the holder of the noncontrolling interest, as ~~more fully~~ described in note (a) to the accompanying ~~tables (see page 54).~~tables.

Refining Segment Results

Refining segment revenues ~~increased $13.4~~decreased $2.2 billion in the first ~~six months~~quarter of ~~2018~~2019 compared to the first ~~six months~~quarter of ~~2017~~2018 primarily due to ~~increases~~decreases in refined petroleum product prices. This ~~improvement~~decline in refining segment revenues was partially offset by ~~higher~~lower cost of sales ~~between the periods,~~of $1.9 billion due primarily to decreases in crude oil and other feedstock costs, resulting in ~~an increase~~

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a decrease in refining segment operating income of ~~$724~~$332 million in the first ~~six months~~quarter of ~~2018~~2019 compared to the first ~~six months~~quarter of ~~2017.~~2018.

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Excluding the adjustments to refining segment operating income ~~for the first six months of 2018~~ reflected in the tables on page ~~50,~~ ~~adjusted~~47, refining segment adjusted operating income ~~was $2.2 billion for~~decreased $330 million in the first ~~six months~~ quarter of ~~2018, an increase of~~ ~~$585 million~~2019 compared to the first ~~six months~~quarter of ~~2017.~~2018. The components of this ~~increase,~~decrease, along with the reasons for the changes in these components, are outlined below.

Refining segment margin, as defined in note ~~(g)~~(c) to the accompanying tables, ~~(see page 54), increased $597~~decreased $228 million in the first ~~six months~~quarter of ~~2018~~2019 compared to the first ~~six months~~quarter of ~~2017,~~2018 primarily due to the following:

~~Increase in distillate margins. We experienced improved distillate margins throughout all our regions during the first six months of 2018 compared to the first six months of 2017.~~

•

Decrease in gasoline margins. We experienced a decrease in gasoline margins throughout all our regions during the first quarter of 2019 compared to the first quarter of 2018. For example, the Brent-based benchmark reference margin for U.S. Gulf Coast CBOB gasoline was $0.16 per barrel for the first quarter of 2019 compared to $7.28 per barrel for the first quarter of 2018, representing an unfavorable decrease of $7.12 per barrel. Another example is the Brent-based benchmark reference margin for North Atlantic CBOB gasoline, which was $1.25 per barrel for the first quarter of 2019 compared to $8.88 per barrel for the first quarter of 2018, representing an unfavorable decrease of $7.63 per barrel. We estimate that the decrease in gasoline margins per barrel in the first quarter of 2019 compared to the first quarter of 2018 had an unfavorable impact to our refining segment margin of approximately $762 million.

•

Lower discounts on other feedstocks. In addition to crude oil, we utilize other feedstocks, such as natural gas and residuals, in certain of our refining processes. We benefit when we process these other feedstocks that are priced at a discount to Brent crude oil. While we benefitted from processing these types of feedstocks during the first three months of 2019, that benefit declined compared to the first three months of 2018. We estimate that the reduction in the discounts for the other feedstocks that we processed during the first three months of 2019 had an unfavorable impact to our refining segment margin of approximately $69 million.


•	Lower throughput volumes. Refining throughput volumes decreased by 66,000 BPD in the first quarter of 2019. We estimate that the decrease in refining throughput volumes had an unfavorable impact on our refining segment margin of approximately $51 million.

•

Higher discounts on crude oils. The market prices for refined petroleum products generally track the price of Brent crude oil, which is a benchmark crude oil, and we benefit when we process crude oils that are priced at a discount to Brent crude oil. We benefitted from processing these types of crude oils during the first quarter of 2019 and that benefit improved compared to the first quarter of 2018. For example, WTI crude oil, a light sweet crude oil, sold at an $8.94 per barrel discount to Brent crude oil for the first quarter of 2019 compared to a $4.29 per barrel discount for the first quarter of 2018, representing a favorable increase of $4.65 per barrel. We estimate that the increase in the discounts for the crude oils we processed during the first quarter of 2019 compared to the first quarter of 2018 had a favorable impact to our refining segment margin of approximately $430 million.

•

Lower costs of biofuel credits. As described in Note 14 of Condensed Notes to Consolidated Financial Statements, we purchase biofuel credits in order to meet our biofuel blending obligation under various government and regulatory compliance programs. The cost of these credits (primarily RINs in the U.S.) was $91 million in the first quarter of 2019 compared to $206 million in the first quarter of 2018, a decrease of $115 million.


•	Increase in distillate margins. We experienced an increase in distillate margins during the first quarter of 2019 compared to the first quarter of 2018. For example, the Brent-based benchmark reference

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margin for U.S. Gulf Coast ~~ultra-low-sulfur~~ULS diesel was ~~$13.62~~$14.99 per barrel for the first ~~six months~~quarter of ~~2018~~2019 compared to ~~$11.06~~$13.78 per barrel for the first ~~six months~~quarter of ~~2017,~~2018, representing a favorable increase of ~~$2.56~~$1.21 per barrel. Another example is the WTI-based benchmark reference margin for U.S. Mid-Continent ~~ultra-low-sulfur~~ULS diesel which was ~~$20.93~~$24.89 per barrel for the first ~~six months~~quarter of ~~2018~~2019 compared to ~~$14.30~~$19.83 per barrel for the first ~~six months~~quarter of ~~2017,~~2018, representing a favorable increase of ~~$6.63~~$5.06 per barrel. We estimate that the increase in distillate margins per barrel in the first ~~six months~~quarter of ~~2018~~2019 compared to the first ~~six months~~quarter of ~~2017~~2018 had a favorable impact to our refining segment margin of approximately ~~$817 million.~~

~~Higher discounts on other feedstocks~~. In addition to crude oil, we utilize other feedstocks, such as natural gas and residuals, in certain of our refining processes. We benefit when we process these other feedstocks that are priced at a discount to Brent crude oil. We benefitted from processing these types of feedstocks during the first six months of 2018 and that benefit improved compared to the first six months of 2017. We estimate that the increase in the discounts for the other feedstocks that we processed during the first six months of 2018 compared to the first six months of 2017 had a favorable impact to our refining segment margin of approximately $160 million.

~~Lower costs of biofuel credits.~~ ~~As more fully described in~~ ~~Note 14~~ of Condensed Notes to Consolidated Financial Statements, we must purchase biofuel credits in order to meet our biofuel blending obligation under various government and regulatory compliance programs, and the cost of these credits (primarily RINs in the U.S.) decreased by $64 million from $401 million for the first six months of 2017 to $337 million for the first six months of 2018.

~~Higher discounts on crude oils.~~ The market prices for refined petroleum products generally track the price of Brent crude oil, which is a benchmark crude oil, and we benefit when we process crude oils that are priced at a discount to Brent crude oil. We benefitted from processing these types of crude oils during the first six months of 2018 and that benefit improved compared to the first six months of 2017. For example, WTI crude oil, a light sweet crude oil processed in our U.S. Mid-Continent region, sold at a discount to Brent crude oil of ~~$5.61~~ ~~per barrel for the first six months of 2018 compared to a discount of~~ ~~$2.74~~ ~~per barrel for the first six months of 2017, representing a favorable increase of~~ ~~$2.87~~ per barrel. Another example is Maya crude oil, a sour crude oil processed in our U.S. Gulf Coast region, which sold at a discount of $11.18 per barrel for the first six months of 2018 compared to a discount of $8.48 per barrel for the first six months of 2017, representing a favorable increase of $2.70 per barrel. We estimate that the increase in the discounts for crude oils

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~~that we processed during the first six months of 2018 compared to the first six months of 2017 had a favorable impact to our refining segment margin of approximately $59~~$91 million.

~~Decrease in other products margins.~~ ~~We experienced a decrease in the margins of other products (such as petroleum coke~~Refining segment operating expenses (excluding depreciation and ~~sulfur) relative to Brent crude oil during the first six months of 2018 compared to the first six months of 2017~~amortization expense) increased$60 million primarily due to an increase in ~~the cost~~maintenance expenditures of ~~crude oils between the periods. Because the market prices for our other products remain relatively stable, our margins decline when the cost~~$27 million and an environmental reserve adjustment of crude oils that we process increases. For example, the benchmark price of Brent crude oil was $71.05 per barrel for the first six months of 2018 compared to $52.78 per barrel for the first six months of 2017, representing an unfavorable increase of $18.27 per barrel. We estimate that the decrease in other products margins for the first six months of 2018 compared to the first six months of 2017 had an unfavorable impact to our refining segment margin of approximately $384 million.

~~Decrease in gasoline margins.~~ We experienced a decrease in gasoline margins during the first six months of 2018 compared to the first six months of 2017. For example, the Brent-based benchmark reference margin for U.S. Gulf Coast CBOB gasoline was $7.38 per barrel for the first six months of 2018 compared to $9.58 per barrel for the first six months of 2017, representing an unfavorable decrease of $2.20 per barrel. Another example is the ANS-based benchmark reference margin for U.S. West Coast CARBOB 87 gasoline, which was $15.82 per barrel for the first six months of 2018 compared to $19.89 per barrel for the first six months of 2017, representing an unfavorable decrease of $4.07 per barrel. We estimate that the decrease in gasoline margins per barrel in the first six months of 2018 compared to the first six months of 2017 had an unfavorable impact to our refining segment margin of approximately $145 million.

~~Increase in charges from VLP.~~ ~~Charges from the VLP segment for transportation and terminaling services increased $51~~$4 million in the first ~~six months~~quarter of ~~2018 compared to~~2019, along with a sales and use tax refund of $7 million and a favorable property tax settlement of $6 million received in the first ~~six months~~quarter of 2017 primarily due to additional services provided by a terminal and a product pipeline system acquired by VLP in November 2017 that were formerly a part of the refining segment. Details regarding the increase in charges from VLP are discussed in the VLP segment analysis below.

2018.

Refining segment depreciation and amortization expense associated with our cost of sales increased ~~$16~~$42 million primarily due to an increase in refinery turnaround and catalyst amortization expense of $27 million and an increase in depreciation expense associated with capital projects completed in 2018 of $8 million.

Ethanol Segment Results

Ethanol segment revenues decreased $78 million in the first ~~six months~~quarter of ~~2018~~2019 compared to the first ~~six months~~quarter of ~~2017.~~

~~Ethanol Segment Results~~

~~Ethanol segment revenues increased $37 million in the first six months of~~ 2018 ~~compared to the first six months of 2017~~ primarily due to ~~increases~~a decrease in ~~corn related co-product prices.~~ethanol prices, partially offset by the revenue contribution associated with three ethanol plants acquired from Green Plains Inc. (Green Plains) on November 15, 2018. This ~~improvement~~decline in ethanol segment ~~revenues~~revenue was partially offset by ~~slightly higher~~lower cost of sales ~~between the periods, resulting~~of $36 million, resulting in ~~an increase~~a decrease in ethanol segment operating income of ~~$35~~$42 million in the first ~~six months~~quarter of ~~2018~~2019 compared to the first ~~six months~~quarter of ~~2017. This increase is primarily due to higher ethanol segment margins, as~~2018. The components of this decrease, along with the reasons for the changes in these components, are outlined below.

Ethanol segment margin, as defined in note ~~(g)~~(c) to the accompanying tables, ~~(see page 54), increased $31~~decreased $23 million in the first ~~six months~~quarter of ~~2018~~2019 compared to the first ~~six months~~quarter of ~~2017,~~2018 primarily due to the following:

•

Lower ethanol prices. Ethanol prices were lower in the first quarter of 2019 compared to the first quarter of 2018 primarily due to an increase in domestic ethanol production. For example, the NYH ethanol price was $1.44 per gallon for the first quarter of 2019 compared to $1.52 per gallon for the first quarter of 2018, representing an unfavorable decrease of $0.08 per gallon. We estimate that the decrease in the price of ethanol had an unfavorable impact to our ethanol segment margin of approximately $17 million.

•

Higher corn prices. Corn prices were higher in the first quarter of 2019 compared to the first quarter of 2018. For example, the CBOT corn price was $3.73 per bushel for the first quarter of 2019 compared to $3.66 per bushel for the first quarter of 2018, representing an unfavorable increase of $0.07 per bushel. We estimate that the increase in the price of corn had an unfavorable impact to our ethanol segment margin of approximately $4 million.

Ethanol segment operating expenses (excluding depreciation and amortization expense) increased $14 million primarily due to costs to operate the three plants acquired from Green Plains in November 2018 of $24 million, partially offset by lower chemicals and catalyst expenses of $5 million, and lower maintenance expenses of $3 million.

~~Higher co-product prices.~~ ~~An increase in export demand for corn related co-products, primarily distillers grains, had a favorable effect on the prices received. We estimate that the increase in corn~~

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~~related co-product prices had a favorable impact to our ethanol segment margin of approximately $75 million.~~

~~Higher production volumes.~~Ethanol segment ~~margin was favorably impacted by~~depreciation and amortization expense associated with our cost of sales increased ~~production volumes of 149,000 gallons per day~~$5 million primarily due to depreciation expense associated with the three plants acquired from Green Plains in November 2018.

Renewable Diesel Segment Results

Renewable diesel segment revenues increased $153 million in the first ~~six months~~quarter of ~~2018~~2019 compared to the first ~~six months~~quarter of ~~2017~~2018 primarily due to ~~reliability improvements. We estimate that the~~an increase in ~~production volumes had a favorable impact~~renewable diesel sales volumes. This improvement in renewable diesel segment revenues was outweighed by higher cost of sales of $299 million primarily due to ~~our ethanol segment margin~~the benefit of ~~$14 million.~~

~~Lower ethanol prices.~~ ~~Ethanol prices were lower~~$160 million related to the 2017 blender’s tax credit recognized in the first ~~six months~~quarter of 2018, as described in note (a) to the accompanying tables, and incremental costs attributable to the expanded production capacity of the plant, resulting in a decrease in renewable diesel segment operating income of $146 million in the first quarter of 2019 compared to the first ~~six months~~quarter of 2018.

Excluding the 2017 primarily due to a decrease in both export and domestic demand. For example, the New York Harbor ethanol price was $1.54 per gallon for the first six months of 2018 compared to $1.59 per gallon for the first six months of 2017, representing an unfavorable decrease of $0.05 per gallon. We estimate that the decrease in the price of ethanol had an unfavorable impact to our ethanol segment margin of $45 million.

~~Higher corn prices.~~ ~~Corn prices were higher~~blender’s tax credit recognized in the first ~~six months~~quarter of 2018 reflected in the table on page 47, renewable diesel segment adjusted operating income increased $14 million in the first quarter of 2019 compared to the first ~~six months~~quarter of 2017. For example, the CBOT corn price was $3.75 per bushel for the first six months of 2018 compared to $3.66 per bushel for the first six months of 2017, representing an unfavorable increase of $0.09 per bushel. We estimate that the increase in the price of corn had an unfavorable impact to our ethanol segment margin of $13 million.

~~VLP Segment Results~~

VLP segment revenues increased $51 million in the first six months of 2018 compared to the first six months of 2017 primarily due to incremental revenues generated from transportation and terminaling services associated with assets acquired by VLP in November 2017 that were formerly a part of the refining segment. This increase in VLP segment revenues was partially offset by increases in other components of cost of sales, resulting in an increase in VLP segment operating income of $26 million in the first six months of 2018 compared to the first six months of 2017.2018. The components of this increase, along with the reasons for the changes in these components, are ~~discussed~~outlined below.

~~VLP~~Renewable diesel segment ~~revenues~~margin, as defined in note (c) to the accompanying tables, increased ~~$51~~$24 million in the first ~~six months~~quarter of 2019 compared to the first quarter of 2018 ~~as previously noted,~~ primarily due to ~~incremental transportation~~the following:

•

Higher sales volumes. Renewable diesel segment margin was favorably impacted by increased sales volumes of 419,000 gallons per day in the first quarter of 2019 compared to the first quarter of 2018 primarily due to the additional production capacity resulting from the expansion of the DGD plant in the third quarter of 2018. We estimate that the increase in sales volumes had a favorable impact to our renewable diesel segment margin of approximately $60 million.


•	Price risk management activities. We recognized a hedge loss of $26 million in the first quarter of 2019 from commodity derivative instruments associated with our price risk management activities compared to a gain of $1 million in the first quarter of 2018, representing an unfavorable impact to our renewable diesel segment margin of $27 million.

•

Lower co-product prices. We produce a variety of co-products, such as naphtha and pentane, and the prices we receive are influenced by natural gasoline prices. Natural gasoline prices were lower in the first quarter of 2019 compared to the first quarter of 2018 due to a decrease in demand, resulting in an unfavorable decrease in the prices we received for the co-products we produced. We estimate that the decrease in co-product prices had an unfavorable impact to our renewable diesel segment margin of approximately $7 million.

Renewable diesel segment operating expenses (excluding depreciation and ~~terminaling revenues~~amortization expense) increased $5 million, which is attributable to the increase in the production of renewable diesel in the first quarter of 2019 compared to the first quarter of 2018 resulting from the ~~Port Arthur terminal~~expansion of the DGD plant in the third quarter of 2018.

Renewable diesel segment depreciation and ~~Parkway pipeline, which VLP acquired from Valero in November 2017. The incremental revenues generated by these assets had a favorable impact to VLP segment revenues of $44 million.~~

~~VLP segment~~amortization expense associated with our cost of sales increased ~~$25~~$5 million primarily due to ~~the costs to operate the Port Arthur terminal and the Parkway pipeline and~~ depreciation expense associated with ~~these assets. VLP acquired these assets~~the expansion of the DGD plant in ~~November 2017.~~the third quarter of 2018.

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Corporate and Eliminations

Corporate and eliminations, which consists primarily of general and administrative expenses and related depreciation and amortization expense, ~~increased~~decreased by ~~$119~~$27 million in the first ~~six months~~quarter of ~~2018~~2019 compared to the first ~~six months~~quarter of ~~2017.~~2018. Excluding the environmental reserve adjustment of ~~$108~~$52 million ~~for~~in the first ~~six months~~quarter of 2018 reflected in the table on page ~~50,~~47, adjusted corporate and eliminations increased by ~~$11~~$25 million primarily due to expenses in the first quarter of 2019 associated with the Merger Transaction with VLP of $7 million, which is more fully described in Note 2 of Condensed Notes to Consolidated Financial Statements, an increase in ~~employee-related expenses.~~legal reserves of $7 million, and higher employee related expenses of $6 million.

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LIQUIDITY AND CAPITAL RESOURCES

~~Liquidity~~Overview

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

Our liquidity consisted of the following as of ~~June 30, 2018~~March 31, 2019 (in millions):


Available borrowing capacity from committed facilities:
Valero Revolver	$	2,881	$	3,945
Canadian Revolver	53		109
Accounts receivable sales facility	1,200		1,200
Letter of credit facility	100		100
Total available borrowing capacity	4,234		5,354
Cash and cash equivalents^(a)	4,168		2,670
Total liquidity	$	8,402	$	8,024

___________________


(a)	Excludes ~~$283~~$107 million of cash and cash equivalents related to our VIEs that is available for use only by our VIEs.

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

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Cash Flows Summary

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


	Six Months Ended June 30,						Three Months Ended March 31,
	2018			2017			2019			2018
Cash flows provided by (used in):
Operating activities	$	2,197		$	2,785		$	877		$	138
Investing activities	(2,132		)	(1,174		)	(747		)	(752		)
Financing activities	(1,402		)	(1,328		)	(378		)	(573		)
Effect of foreign exchange rate changes on cash	(62		)	108			43			(5		)
Net increase (decrease) in cash and cash equivalents	$	(1,399	)	$	391
Net decrease in cash and cash equivalents							$	(205	)	$	(1,192	)

Cash Flows for the ~~Six~~Three Months Ended ~~June 30,2018~~March 31,2019

Our operations generated ~~$2.2 billion~~$877 million of cash in the first ~~six~~three months of ~~2018,~~2019, driven primarily by net income of ~~$1.5 billion and~~$167 million, noncash charges to income ~~for depreciation~~of $529 million, and ~~amortization expense of $1.0 billion, partially offset by~~ a ~~negative~~positive change in working capital of ~~$445~~$130 million. Noncash charges included $551 million of depreciation and amortization expense, partially offset by a $22 million deferred income tax benefit. See “RESULTS OF OPERATIONS” for further discussion of our operations. The change in our working capital is ~~further~~ detailed in Note 12 of Condensed Notes to Consolidated Financial Statements. The ~~use~~source of cash resulting from the ~~$445~~$130 million change in working capital was mainly due to:

an increase in accounts payable due to an increase in commodity prices combined with an increase in crude oil volumes purchased and the timing of payments of invoices; partially offset by

an increase in receivables resulting from an increase in commodity prices combined with an increase in sales volumes;

a decrease in taxes other than income taxes payable ~~resulting from~~mainly due to the ~~$400 million~~payment of value-added and ad valorem taxes; and

a decrease in accrued expenses mainly due to the payment of our ~~fourth quarter 2017 estimated taxes in January~~annual incentive compensation related to 2018.

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The ~~$2.2 billion~~$877 million of cash generated by our operations, along with (i) ~~$1.3~~$1.9 billion in proceeds from debt issuances and borrowings and $23 million in proceeds from borrowings of certain VIEs (as ~~further~~ discussed in Note 45 of Condensed Notes to Consolidated Financial Statements) and (ii) ~~$1.4 billion~~$205 million from available cash on hand, were used mainly to:

fund ~~$1.3 billion~~$726 million in capital investments, which include capital expenditures, deferred turnaround and catalyst costs, and investments in joint ventures;

fund ~~$562~~$19 million ~~for the Peru Acquisition and other minor acquisitions;~~

~~acquire undivided interests in pipeline and terminal assets for $145 million;~~

~~redeem our 9.375 percent Senior Notes for $787 million (or 104.9 percent~~ of ~~stated value);~~capital expenditures of certain VIEs;

make payments on debt and ~~capital~~finance lease obligations of ~~$421~~$907 million, ~~of which $410 million~~primarily related to the repayment of ~~all outstanding~~$900 million on borrowings under ~~the VLP Revolver;~~

~~retire $137 million of debt assumed in connection with the Peru Acquisition;~~our accounts receivable sales facility;

purchase common stock for treasury of ~~$647~~$36 million; ~~and~~

pay common stock dividends of ~~$690~~$375 million; and

acquire all of the outstanding publicly held common units of VLP for $950 million.

Cash Flows for the ~~Six~~Three Months Ended ~~June 30, 2017~~March 31, 2018

Our operations generated ~~$2.8 billion~~$138 million of cash in the first ~~six~~three months of ~~2017,~~2018, driven primarily by net income of ~~$893~~$582 million, noncash charges to income of ~~$999~~$500 million, ~~related to~~partially offset by a negative change

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in working capital of $1.1 billion. Noncash charges included $498 million of depreciation and amortization expense and ~~a positive change in working capital~~$2 million of ~~$859 million.~~deferred income tax expense. See “RESULTS OF OPERATIONS” for further discussion of our operations. The change in our working capital is ~~further~~ detailed in Note 12 of Condensed Notes to Consolidated Financial Statements. The ~~source~~use of cash resulting from the ~~$859 million~~$1.1 billion change in working capital was mainly due to:

~~a decrease in receivables, partially offset by~~ a decrease in accounts payable primarily as a result of the timing of ~~collections of receivables and~~ payments of ~~invoices, respectively, combined with~~ invoices;

a decrease in ~~commodity prices;~~income taxes payable resulting from the January 2018 payment of our fourth quarter 2017 estimated taxes that were previously deferred, as allowed by tax relief authorization from the Internal Revenue Service (IRS);

~~an increase~~a decrease in accrued expenses mainly due to the ~~timing~~payment of ~~payments on~~ our ~~environmental compliance program obligations; and~~annual incentive compensation related to 2017;

a decrease in ~~inventory volumes held.~~taxes other than income taxes payable mainly due to the payment of excise and ad valorem taxes; and


•	an increasein inventory, mainly due to an increase in commodity prices; partially offset by

a decrease in receivables primarily as a result of the timing of collections of receivables.

The ~~$2.8 billion~~$138 million of cash generated by our operations, along with (i) ~~net~~$498 million in proceeds from the issuance of ~~$36 million from~~ VLP’s ~~sale of common units representing limited partner interests~~4.5 percent Senior Notes (that were available only to the ~~public~~operations of VLP, as discussed in Note 5 of Condensed Notes to Consolidated Financial Statements) and (ii) ~~$108 million~~$1.2 billion from ~~the effects of a favorable change in foreign exchange rates,~~available cash on hand, were used mainly to:

fund ~~$1.1 billion~~$631 million in capital investments, which include capital expenditures, deferred turnaround and catalyst costs, and investments in joint ventures;

acquire an undivided ~~interest~~interests in ~~crude system~~pipeline and terminal assets for ~~$72~~$85 million;


•	make payments on debt and finance lease obligations of $415 million, of which $410 million related to the repayment of all outstanding borrowings under the VLP Revolver;

purchase common stock for treasury of ~~$660~~$320 million; and

pay common stock dividends of ~~$627 million;~~

~~pay distributions to noncontrolling interests of $45 million; and~~

~~increase available cash on hand by $391~~$345 million.

~~Summary of Credit Facilities~~

~~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.~~

~~Capital Resources~~

Capital Investments

~~Our anticipated capital investments for 2018 have not changed from the amounts~~As previously disclosed in our annual report on Form 10-K for the year ended December 31, ~~2017 as~~2018, we expect to incur approximately ~~$2.7~~$2.5 billion for

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capital investments ~~which includes~~during 2019 and also 2020. Capital investments include capital expenditures, turnaround and catalyst costs, and investments in joint ventures. Capital expenditures include the capital expenditures of our consolidated subsidiaries and consolidated VIEs in which we hold an ownership interest. ~~This consists~~Our capital investments consist of approximately ~~$1.7 billion~~60 percent for ~~stay-in-business~~sustaining capital and ~~$1.0 billion~~40 percent for growth strategies. This capital investment estimate excludes potential strategic acquisitions, including acquisitions of undivided interests. We continuously evaluate our capital budget and make changes as conditions warrant.

In addition to our capital investments noted above, we separately reflect in our statements of cash flows the capital expenditures of certain VIEs that we consolidate even though we do not hold an ownership interest in them. These expenditures are not included in our ~~$2.7~~$2.5 billionestimate of capital investments for ~~2018.~~2019 or 2020. See Note 78 of Condensed Notes to Consolidated Financial Statements for a description of our VIEs.

Other Matters Impacting Liquidity and Capital Resources

Stock Purchase Program

On January 23, 2018, our board of directors authorized our purchase of up to an additional $2.5 billion of our outstanding common stock (the 2018 program) with no expiration date. ~~This authorization was in addition to the remaining amount available under a $2.5 billion program authorized on September 21, 2016 (the 2016 program).~~ As of ~~June 30, 2018,~~March 31, 2019, we had ~~approximately $3.2~~

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$2.2 billion ~~of authorization~~ remaining available for purchase under ~~our programs.~~the 2018 Program. We have no obligation to make purchases under ~~these programs.~~this program.

Pension Plan Funding

~~Management has elected~~As previously disclosed in our annual report on Form 10-K for the year ended December 31, 2018, we plan to ~~increase the discretionary contributions~~contribute approximately $35 million to our pension plans by $10 million during the second half of 2018, resulting in expected contributions to our pension plans of approximately $141 million for 2018, which now includes discretionary contributions of $110 million. Our plan to also contribute approximately $19and $21 million to our other postretirement benefit plans during ~~2018 remains unchanged.~~2019.

Environmental Matters

Our operations are subject to extensive environmental regulations by governmental authorities relating to the discharge of materials into the environment, waste management, pollution prevention measures, GHG emissions, and characteristics and composition of gasolines and distillates. Because environmental laws and regulations are becoming more complex and stringent and new environmental laws and regulations are continuously being enacted or proposed, the level of future expenditures required for environmental matters could increase in the future. In addition, any major upgrades in any of our operating facilities could require material additional expenditures to comply with environmental laws and regulations. ~~See Note 5 of Condensed Notes to Consolidated Financial Statements for a further discussion of our environmental matters.~~

Tax Matters

The IRS has ongoing audits related to our U.S. federal income tax returns from ~~2010~~2012 through 2015. ~~We have received Revenue Agent Reports in connection with~~During the first quarter of 2019, we settled the combined audit related to our U.S. federal income tax returns for 2010 and 2011 ~~combined audit. We have made significant progress in resolving this audit, which we believe~~and will ~~be settled within the next 12 months. Upon settlement, we anticipate receiving~~receive a ~~refund; therefore, we have a receivable~~refund of $320 million, plus interest, associated with this ~~audit as of June 30, 2018.~~audit. We dodid not ~~expect to~~ have a significant change to our uncertain tax positions upon the settlement of ~~our ongoing audits,~~the 2010 and we2011 combined audit. We believe that the ultimate settlement of our 2012 through 2015 audits will not be material to our financial position, results of operations, or liquidity.

We continue to evaluate both provisional and incomplete estimates due to Tax Reform related to our 2017 tax provision. As discussed in Note 9 of Condensed Notes to Consolidated Financial Statements, there have been no updates to these amounts as of June 30, 2018.

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Cash Held by Our International Subsidiaries

~~In conjunction with our implementation~~As of ~~the provisions under Tax Reform, which was enacted on~~ December ~~22,~~31, 2017, ~~and described in Note 9 of Condensed Notes to Consolidated Financial Statements, we recorded a liability in 2017 for the estimated U.S. federal tax due on the deemed repatriation of~~ the accumulated earnings and profits of our international subsidiaries not previously distributed ~~to us,~~were included in our computation of the one-time deemed repatriation tax liability associated with the enactment of the Tax Cuts and ~~we will pay this liability over the eight-year period permitted by the provisions under Tax Reform.~~Jobs Act of 2017 (Tax Reform). Because of the deemed repatriation of these accumulated earnings and profits, there are no longer any U.S. federal income tax consequences associated with the repatriation of any of the ~~$2.4~~$1.5 billion of cash and cash equivalents held by our international subsidiaries as of ~~June 30, 2018.~~March 31, 2019. However, certain countries in which our international subsidiaries are organized impose withholding taxes on cash distributed outside of those countries. We have accrued for withholding taxes on the portion of the cash held by one of our international subsidiaries that we have deemed not to be permanently reinvested in our operations in that country.

~~Cash provided~~ The remaining cash held by ~~operating activities in the U.S. continues to be our primary source of funds to finance our U.S. operations and capital expenditures,~~that subsidiary, as well as our ~~dividends and share repurchases.~~other international subsidiaries, will be permanently reinvested in our operations in those countries.

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. 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.

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CONTRACTUAL OBLIGATIONS

As of ~~June 30, 2018,~~March 31, 2019, our contractual obligations included debt, ~~capital~~finance lease obligations, operating lease obligations, purchase obligations, and other long-term liabilities. There were no material changes outside the ordinary course of business with respect to our contractual obligations during the ~~six~~three months ended ~~June 30, 2018.~~March 31, 2019. However, in the ordinary course of business, we had various debt-related activities during the ~~six~~three months ended ~~June 30, 2018~~March 31, 2019 and in April 2019 as described in Note 45 of Condensed Notes to Consolidated Financial Statements.

Our debt and financing agreements do not have rating agency triggers that would automatically require us to post additional collateral. However, in the event of certain downgrades of our senior unsecured debt by the ratings agencies, the cost of borrowings under some of our bank credit facilities and other arrangements would increase. ~~All~~As of March 31, 2019, all of our ratings on our senior unsecured debt, including debt guaranteed by us, are at or above investment grade level as follows:



	~~Rating~~
Rating Agency	~~Valero~~	~~VLP~~Rating
Moody’s Investors Service	Baa2 ~~(stable outlook)~~	~~Baa3~~ (stable outlook)
Standard & Poor’s Ratings Services	BBB (stable outlook)	~~BBB- (stable outlook)~~
Fitch Ratings	BBB (stable outlook)	~~BBB- (stable outlook)~~

We cannot provide assurance that these ratings will remain in effect for any given period of time or that one or more of these ratings will not be lowered or withdrawn entirely by a rating agency. We note that these credit ratings are not recommendations to buy, sell, or hold our securities. Each rating should be evaluated

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independently of any other rating. Any future reduction below investment grade or withdrawal of one or more of our credit ratings could have a material adverse impact on our ability to obtain short- and long-term financing and the cost of such financings.

CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements in conformity with U.S.GAAP requires us to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Actual results could differ from those estimates. As of ~~June 30, 2018~~March 31, 2019, there were no significant changes to our critical accounting policies that involved critical accounting estimates since the date our annual report on Form 10‑K for the year ended December 31, ~~2017~~2018 was filed.

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ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

COMMODITY PRICE RISK

inventories and firm commitments to purchase inventories generally for amounts by which our current year inventory levels (determined on a LIFO basis) differ from our previous year-end LIFO inventory levels, and

forecasted feedstock and refined petroleum product purchases, refined petroleum product sales, natural gas purchases, and corn purchases to lock in the price of those forecasted transactions at existing market prices that we deem favorable.

We use the futures markets for the available liquidity, which provides greater flexibility in transacting our price risk activities. We use swaps primarily to manage our price exposure. We also enter into certain commodity derivative instruments for trading purposes to take advantage of existing market conditions related to future results of operations and cash flows.

Our positions in commodity derivative instruments are monitored and managed on a daily basis by our risk control group to ensure compliance with our stated risk management policy that has been approved by our board of directors.

~~We prepared a~~The following sensitivity analysis ~~of open positions~~includes all of our ~~commodity derivative instruments. As of~~ ~~June 30, 2018~~ ~~and December 31, 2017, the amount of gain or loss in the fair value of commodity~~ derivative instruments ~~that would~~entered into for purposes other than trading with which we have ~~resulted from a 10 percent increase or decrease in the underlying price of the contracts was not material.~~ market risk (in millions):



	March 31, 2019			December 31, 2018
Gain (loss) in fair value resulting from:
10% increase in underlying commodity prices	$	(71	)	$	2
10% decrease in underlying commodity prices	61			(6		)

See Note 14 of Condensed Notes to Consolidated Financial Statements for notional volumes associated with these derivative contracts as of ~~June 30, 2018~~.March 31, 2019.

COMPLIANCE PROGRAM PRICE RISK

We are exposed to market risk related to the volatility in the price of ~~biofuel credits and GHG emission~~ credits needed to comply with various governmental and regulatory environmental compliance programs. To manage ~~these risks,~~this risk, we enter into contracts to purchase these credits when prices are deemed favorable. Some of these contracts are

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derivative instruments; however, we elect the normal purchase exception and do not record these contracts at their fair values. As of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, the amount of gain or loss in the fair value of derivative instruments that would have resulted from a 10 percent increase or decrease in the underlying price of the contracts was not material. See Note 14 of Condensed Notes to Consolidated Financial Statements for a discussion about these compliance programs.

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INTEREST RATE RISK

The following table provides information about our debt instruments (dollars in millions), the fair values of which are sensitive to changes in interest rates. Principal cash flows and related weighted-average interest rates by expected maturity dates are presented.


	June 30, 2018																							March 31, 2019
	Expected Maturity Dates																							Expected Maturity Dates
	2018			2019			2020			2021			2022			There- after			Total (a)			Fair Value		Remainder of 2019			2020			2021			2022			2023			There- after			Total (a)			Fair Value
Fixed rate	$	—		$	—		$	850		$	10		$	—		$	7,474		$	8,334		$	9,110	$	850		$	—		$	10		$	—		$	—		$	8,474		$	9,334		$	10,346
Average interest rate	—		%	—		%	6.1		%	5.0		%	—		%	5.4		%	5.5		%			6.1		%	—		%	5		%	—		%	—		%	5.2		%	5.3		%
Floating rate (b)	$	159		$	5		$	6		$	5		$	6		$	19		$	200		$	200	$	236		$	5		$	5		$	5		$	20		$	—		$	271		$	271
Average interest rate	3.9		%	4.2		%	4.2		%	4.2		%	4.2		%	4.2		%	3.9		%			5.0		%	4.5		%	4.5		%	4.5		%	4.5		%	—		%	5.0		%

	December 31, 2017																							December 31, 2018
	Expected Maturity Dates																							Expected Maturity Dates
	2018			2019			2020			2021			2022			There- after			Total (a)			Fair Value		2019			2020			2021			2022			2023			There- after			Total (a)			Fair Value
Fixed rate	$	—		$	750		$	850		$	—		$	—		$	6,224		$	7,824		$	9,236	$	—		$	850		$	10		$	—		$	—		$	7,474		$	8,334		$	8,737
Average interest rate	—		%	9.4		%	6.1		%	—		%	—		%	5.6		%	6.0		%			—		%	6.1		%	5		%	—		%	—		%	5.4		%	5.5		%
Floating rate (b)	$	106		$	6		$	416		$	6		$	6		$	19		$	559		$	559	$	214		$	5		$	5		$	5		$	20		$	—		$	249		$	249
Average interest rate	2.1		%	3.8		%	2.9		%	3.8		%	3.8		%	3.8		%	2.8		%			4.6		%	4.7		%	4.7		%	4.7		%	4.7		%	—		%	4.6		%

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(a)	Excludes unamortized discounts and debt issuance costs.


(b)	As of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, we had an interest rate swap associated with ~~$44~~$39 million and ~~$49~~$40 million, respectively, of our floating rate debt resulting in an effective interest rate of 3.85 percent as of each of those reporting dates. The fair value of the swap was immaterial for all periods presented.

FOREIGN CURRENCY RISK

As of ~~June 30, 2018~~March 31, 2019, we had ~~commitments~~foreign currency contracts to purchase ~~$487~~$418 million of U.S. ~~dollars.~~dollars, $1.7 billion of U.S. dollar equivalent Canadian dollars, and $300 million of U.S. dollar equivalent pounds sterling. Our market risk was minimal on these contracts, as ~~all~~the majority of them matured on or before ~~July 31, 2018.~~April 30, 2019.

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ITEM 4.	CONTROLS AND PROCEDURES


(a)	Evaluation of disclosure controls and procedures.

Our management has evaluated, with the participation of our principal executive officer and principal financial officer, the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report, and has concluded that our disclosure controls and procedures were effective as of ~~June 30, 2018.~~March 31, 2019.


(b)	Changes in internal control over financial reporting.

There has been no change in our internal control over financial reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

We continue the implementation process to prepare for the adoption of Topic 842, which we discuss in Note 1 of Condensed Notes to Consolidated Financial Statements. We expect that there will be changes affecting our internal control over financial reporting in conjunction with adopting this standard. The most significant changes we expect relate to the implementation of a lease evaluation system and a lease accounting system, including the integration of our lease accounting system with our general ledger and modifications to the related procurement and payment processes.

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PART II – OTHER INFORMATION


ITEM 1.	LEGAL PROCEEDINGS

The information below describes new proceedings or material developments in proceedings that we previously reported in our annual report on Form 10-K for the year ended December 31, ~~2017.~~2018.

~~Litigation~~

~~We incorporate by reference into this Item our disclosures made in Part I, Item 1 of this report included in~~ ~~Note 5~~ ~~of Condensed Notes to Consolidated Financial Statements under the caption~~ ~~“Environmental Matters”~~ ~~and~~ ~~“Litigation Matters.”~~

Environmental Enforcement Matters

While it is not possible to predict the outcome of the following environmental proceedings, if any one or more of them were decided against us, we believe that there would be no material effect on our financial position, results of operations, or liquidity. We are reporting these proceedings to comply with SEC regulations, which require us to disclose certain information about proceedings arising under federal, state, or local provisions regulating the discharge of materials into the environment or protecting the environment if we reasonably believe that such proceedings will result in monetary sanctions of $100,000 or more.

~~People~~Bay Area Air Quality Management District (BAAQMD) and Solano County Department of Resource Management Certified Unified Program Agency (Solano County) (Benicia Refinery). We have received multiple Violation Notices (VNs) issued by the BAAQMD related to an upset of the ~~State~~Flue Gas Scrubber (FGS) at our Benicia Refinery. In the aggregate, we reasonably believe penalties for these VNs may be in excess of ~~Illinois, ex rel. v.~~$100,000. We are working with the BAAQMD to resolve these VNs. We have also received a draft Consent Order (Docket AEO-2019-103) from Solano County related to the FGS incident. The ~~Premcor Refining Group Inc., et al., Third Judicial Circuit Court, Madison~~draft Consent Order assesses proposed penalties of $242,840. We are working with Solano County ~~(Case No. 03-CH-00459, filed May 29, 2003) (Hartford Refinery and terminal)~~to resolve this matter.

BAAQMD (Benicia Refinery). In our ~~quarterly~~annual report on Form ~~10-Q~~10-K for the ~~quarter~~year ended ~~March~~December 31, 2018, we reported that we had multiple outstanding VNs issued by the ~~Illinois EPA had filed suit against The Premcor Refining Group Inc. alleging~~BAAQMD. These VNs are for various alleged air regulation and air permit violations ~~of air~~at our Benicia Refinery and ~~waste regulations at Premcor’s Hartford, Illinois terminal and closed refinery. During the second quarter of 2018, we entered into a consent order~~asphalt plant. We continue to work with the ~~Illinois EPA resolving all outstanding issues pending~~BAAQMD to resolve these VNs.

Attorney General of the State of Texas (Texas AG) (Corpus Christi Asphalt Plant). We have received a letter and draft Agreed Final Judgment from the Texas AG related to a contaminated water backflow incident that occurred at the Valero Corpus Christi Asphalt Plant. The draft Agreed Final Judgment assesses proposed penalties in the amount of $1,300,000. We are working with the state. This consent order has been lodged with the court and is pending the court’s confirmation. Our litigation with other potentially responsible parties (PRPs) remains ongoing and we are continuingTexas AG to ~~assert our various defenses, limitations and potential rights for contribution from the other PRPs.~~resolve this matter.

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Texas Commission on Environmental Quality (TCEQ) ~~(Port Arthur)~~ (Corpus Christi Refinery). ~~During the second quarter of 2018, we~~We have received a ~~Notice of Enforcement~~proposed Agreed Order from the TCEQ ~~alleging unauthorized emissions associated with~~in the ~~November 18, 2017 release~~amount of ~~crude oil from the 24-inch fill pipe of Tank T-285.~~$167,550, for inspection and permit violations related to third party tanks located at our Corpus Christi Refinery that we operate. We are working with the TCEQ to resolve this matter.

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ITEM 1A.	RISK FACTORS

There have been no changes from the risk factors disclosed in our annual report on Form 10-K for the year ended December 31, ~~2017.~~2018.


ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS


(a)	Unregistered Sales of Equity Securities. Not applicable.


(b)	Use of Proceeds. Not applicable.


(c)	Issuer Purchases of Equity Securities. The following table discloses purchases of shares of our common stock made by us or on our behalf during the ~~second~~first quarter of ~~2018.~~2019.

Period
Total Number
of Shares
Purchased

Average
Price Paid
per Share

Total Number of
Shares Not
Purchased as Part of
Publicly Announced
Plans or Programs (a)

Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs

Approximate Dollar
Value of Shares that
May Yet Be Purchased
Under the Plans or
Programs (b)
April 2018 46,946
$ 108.23
46,946
—
$3.5 billion
May 2018 779,733
$ 116.23
601,552
178,181
$3.4 billion
June 2018 1,969,635
$ 117.34
1,176
1,968,459
$3.2 billion
Total 2,796,314
$ 116.88
649,674
2,146,640
$3.2 billion



Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Not Purchased as Part of Publicly Announced Plans or Programs (a)	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (b)
January 2019	17,551	$	78.34	17,551	—	$2.2 billion
February 2019	379	$	83.95	379	—	$2.2 billion
March 2019	395,665	$	86.44	2,429	393,236	$2.2 billion
Total	413,595	$	86.09	20,359	393,236	$2.2 billion

___________________

(a)

The shares reported in this column represent purchases settled in the ~~second~~first quarter of ~~2018~~2019 relating to (i) our purchases of shares in open-market transactions to meet our obligations under stock-based compensation plans and (ii) our purchases of shares from our employees and non-employee directors in connection with the exercise of stock options, the vesting of restricted stock, and other stock compensation transactions in accordance with the terms of our stock-based compensation plans.

(b)

On January 23, 2018, we announced that our board of directors authorized our purchase of up to $2.5 billion of our outstanding common stock, with no expiration ~~date, which was in addition to the remaining amount available under a $2.5 billion program authorized on September 21, 2016.~~date. As of ~~June 30, 2018, the approximate dollar value of shares that may yet be purchased under the 2016 program is $712 million and no purchases have been made~~March 31, 2019, we had $2.2 billion remaining available for purchase under the 2018 ~~program.~~Program.

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ITEM 6.	EXHIBITS



Exhibit No.		Description

*31.0110.01		Fourth Amended and Restated Revolving Credit Agreement, dated as of March 19, 2019, among Valero Energy Corporation, as Borrower; JPMorgan Chase Bank, N.A., as Administrative Agent; and the lenders named therein–incorporated by reference to Exhibit 10.1 to Valero’s Current Report on Form 8-K dated March 19, 2019, and filed March 19, 2019 (SEC File No. 1-13175).

*31.01		Rule 13a-14(a) Certification (under Section 302 of the Sarbanes-Oxley Act of 2002) of principal executive officer.

*31.02		Rule 13a-14(a) Certification (under Section 302 of the Sarbanes-Oxley Act of 2002) of principal financial officer.

**32.01		Section 1350 Certifications (under Section 906 of the Sarbanes-Oxley Act of 2002).

***101		Interactive Data Files

___________________


*	Filed herewith.


**	Furnished herewith.


***	Submitted electronically herewith.

Certain agreements relating to our long-term debt have not been filed as exhibits as permitted by paragraph (b)(4)(iii)(A) of Item 601 of Regulation S-K since the total amount of securities authorized under any such agreements do not exceed 10 percent of our total consolidated assets. Upon request, we will furnish to the SEC all constituent agreements defining the rights of holders of our long-term debt not filed herewith.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.




		VALERO ENERGY CORPORATION (Registrant)
	By:	/s/ Donna M. Titzman
		Donna M. Titzman
		Executive Vice President and
		Chief Financial Officer
		(Duly Authorized Officer and Principal
		Financial and Accounting Officer)

Date: ~~August 6, 2018~~May 7, 2019

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Current assets, net of cash acquired	$	147
Property, plant, and equipment	137
Deferred charges and other assets	451
Current liabilities, excluding current portion of debt	(25		)
Debt assumed, including current portion	(137		)
Deferred income tax liabilities	(81		)
Other long-term liabilities	(21		)
Total consideration, net of cash acquired	$	471



	Six Months Ended June 30,
	2018									2017
	Valero Stockholders’ Equity			Non- controlling Interests (a)			Total Equity			Valero Stockholders’ Equity			Non- controlling Interests (a)			Total Equity
Balance as of beginning of period	$	21,991		$	909		$	22,900		$	20,024		$	830		$	20,854
Net income	1,314			143			1,457			853			40			893
Dividends	(690		)	—			(690		)	(627		)	—			(627		)
Stock-based compensation expense	29			—			29			25			—			25
Transactions in connection with stock-based compensation plans	(134		)	—			(134		)	(13		)	—			(13		)
Stock purchases under purchase programs	(508		)	—			(508		)	(649		)	—			(649		)
Contribution from noncontrolling interest	—			32			32			—			—			—
Distributions to noncontrolling interests	—			(50		)	(50		)	—			(45		)	(45		)
Other	(2		)	3			1			23			17			40
Other comprehensive income (loss)	(231		)	(2		)	(233		)	287			—			287
Balance as of end of period	$	21,769		$	1,035		$	22,804		$	19,923		$	842		$	20,765



Trading Derivatives	Location of Gain (Loss) Recognized in Income on Derivatives	Three Months Ended June 30,					Six Months Ended June 30,
Trading Derivatives	Location of Gain (Loss) Recognized in Income on Derivatives	2018		2017			2018		2017
Commodity contracts	Cost of materials and other	$	51	$	(3	)	$	87	$	(2	)



	Six Months Ended June 30, 2018
	Refining		Ethanol		VLP		Corporate and Eliminations			Total Company
Revenues:
Revenues from external customers	$	55,691	$	1,761	$	—	$	2		$	57,454
Intersegment revenues	5		88		267		(360		)	—
Total revenues	55,696		1,849		267		(358		)	57,454
Cost of sales:
Cost of materials and other (a)	50,471		1,503		—		(358		)	51,616
Operating expenses (excluding depreciation and amortization expense reflected below)	1,966		220		62		(2		)	2,246
Depreciation and amortization expense	919		38		38		—			995
Total cost of sales	53,356		1,761		100		(360		)	54,857
Other operating expenses (c)	31		—		—		—			31
General and administrative expenses (excluding depreciation and amortization expense reflected below) (d)	—		—		—		486			486
Depreciation and amortization expense	—		—		—		26			26
Operating income by segment	$	2,309	$	88	$	167	$	(510	)	2,054
Other income, net (e)										46
Interest and debt expense, net of capitalized interest										(245		)
Income before income tax expense										1,855
Income tax expense (f)										398
Net income										1,457
Less: Net income attributable to noncontrolling interests (a)										143
Net income attributable to Valero Energy Corporation stockholders										$	1,314



	Six Months Ended June 30, 2017
	Refining		Ethanol		VLP		Corporate and Eliminations			Total Company
Revenues:
Revenues from external customers	$	42,302	$	1,724	$	—	$	—		$	44,026
Intersegment revenues	—		88		216		(304		)	—
Total revenues	42,302		1,812		216		(304		)	44,026
Cost of sales:
Cost of materials and other	37,844		1,497		—		(304		)	39,037
Operating expenses (excluding depreciation and amortization expense reflected below) (b)	1,970		216		51		(2		)	2,235
Depreciation and amortization expense	903		46		24		—			973
Total cost of sales	40,717		1,759		75		(306		)	42,245
General and administrative expenses (excluding depreciation and amortization expense reflected below) (b)	—		—		—		367			367
Depreciation and amortization expense	—		—		—		26			26
Operating income by segment	$	1,585	$	53	$	141	$	(391	)	1,388
Other income, net (b)										53
Interest and debt expense, net of capitalized interest										(240		)
Income before income tax expense										1,201
Income tax expense										308
Net income										893
Less: Net income attributable to noncontrolling interests										40
Net income attributable to Valero Energy Corporation stockholders										$	853