Valero Energy Annual Report 2017

Plain-text annual report

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 10-K(Mark One)þANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2017ORoTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _______________Commission file number 1-13175VALERO ENERGY CORPORATION(Exact name of registrant as specified in its charter)Delaware74-1828067(State or other jurisdiction of(I.R.S. Employerincorporation or organization)Identification No.)One Valero Way San Antonio, Texas78249(Address of principal executive offices)(Zip Code) Registrant’s telephone number, including area code: (210) 345-2000 Securities registered pursuant to Section 12(b) of the Act: Common stock, $0.01 par value per share listed on the New York Stock Exchange.Securities registered pursuant to Section 12(g) of the Act: None.Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.Yes þ No oIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.Yes o No þIndicate 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 1934during 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 filingrequirements for the past 90 days. Yes þ No oIndicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required tobe 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 thatthe registrant was required to submit and post such files). Yes þ No oIndicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K orany amendment to this Form 10-K. þIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or anemerging 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 oSmaller reporting company o Emerging growth company oIf 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 orrevised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. oIndicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þThe aggregate market value of the voting and non-voting common stock held by non-affiliates was approximately $29.8 billion based on the last sales pricequoted as of June 30, 2017 on the New York Stock Exchange, the last business day of the registrant’s most recently completed second fiscal quarter.As of January 31, 2018, 433,176,258 shares of the registrant’s common stock were outstanding.DOCUMENTS INCORPORATED BY REFERENCEWe intend to file with the Securities and Exchange Commission a definitive Proxy Statement for our Annual Meeting of Stockholders scheduled for May 3,2018, at which directors will be elected. Portions of the 2018 Proxy Statement are incorporated by reference in Part III of this Form 10-K and are deemed to bea part of this report.Table of ContentsCROSS-REFERENCE SHEETThe following table indicates the headings in the 2018 Proxy Statement where certain information required in Part III of this Form 10-Kmay be found.Form 10-K ItemNo. and Caption Heading in 2018 Proxy Statement 10.Directors,ExecutiveOfficers andCorporateGovernance Information Regarding the Board of Directors, Independent Directors, AuditCommittee, Proposal No. 1 Election of Directors, Information ConcerningNominees and Other Directors, Identification of ExecutiveOfficers, Section 16(a) Beneficial Ownership Reporting Compliance,and Governance Documents and Codes of Ethics 11.ExecutiveCompensation Compensation Committee, Compensation Discussion and Analysis, ExecutiveCompensation, Director Compensation, Pay Ratio Disclosure, and CertainRelationships and Related Transactions 12.SecurityOwnership ofCertainBeneficialOwners andManagementand RelatedStockholderMatters Beneficial Ownership of Valero Securities and Equity Compensation PlanInformation 13.CertainRelationshipsand RelatedTransactions,andDirectorIndependence Certain Relationships and Related Transactions and Independent Directors 14.PrincipalAccountantFees andServices KPMG LLP Fees and Audit Committee Pre-Approval PolicyCopies of all documents incorporated by reference, other than exhibits to such documents, will be provided without charge to eachperson who receives a copy of this Form 10-K upon written request to Valero Energy Corporation, Attn: Secretary, P.O. Box 696000,San Antonio, Texas 78269-6000.iCONTENTS PAGEPART I 1Items 1. & 2.Business and Properties1 Segments2 Valero’s Operations3 Environmental Matters15 Properties15Item 1A.Risk Factors16Item 1B.Unresolved Staff Comments23Item 3.Legal Proceedings23Item 4.Mine Safety Disclosures24 PART II 24Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities24Item 6.Selected Financial Data27Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations28Item 7A.Quantitative and Qualitative Disclosures About Market Risk62Item 8.Financial Statements and Supplementary Data65Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure138Item 9A.Controls and Procedures138Item 9B.Other Information138 PART III 138Item 10.Directors, Executive Officers and Corporate Governance138Item 11.Executive Compensation138Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters138Item 13.Certain Relationships and Related Transactions, and Director Independence138Item 14.Principal Accountant Fees and Services138 PART IV 139Item 15.Exhibits and Financial Statement Schedules139 Signature 143 iiTable of ContentsThe terms “Valero,” “we,” “our,” and “us,” as used in this report, may refer to Valero Energy Corporation, to one or more of ourconsolidated subsidiaries, or to all of them taken as a whole. In this Form 10-K, we make certain forward-looking statements, includingstatements regarding our plans, strategies, objectives, expectations, intentions, and resources under the safe harbor provisions of thePrivate Securities Litigation Reform Act of 1995. You should read our forward-looking statements together with our disclosuresbeginning on page 28 of this report under the heading: “CAUTIONARY STATEMENT FOR THE PURPOSE OF SAFE HARBORPROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.”PART IITEMS 1. and 2. BUSINESS AND PROPERTIESOVERVIEWWe are a Fortune 500 company based in San Antonio, Texas. Our corporate offices are at One Valero Way, San Antonio, Texas,78249, and our telephone number is (210) 345-2000. We were incorporated in Delaware in 1981 under the name Valero Refining andMarketing Company. We changed our name to Valero Energy Corporation on August 1, 1997. Our common stock trades on the NewYork Stock Exchange (NYSE) under the symbol “VLO.” On January 31, 2018, we had 10,015 employees.We own 15 petroleum refineries located in the United States (U.S.), Canada, and the United Kingdom (U.K.) with a combinedthroughput capacity of approximately 3.1 million barrels per day. Our refineries produce conventional gasolines, premium gasolines,gasoline meeting the specifications of the California Air Resources Board (CARB), diesel, low-sulfur diesel, ultra-low-sulfur diesel,CARB diesel, other distillates, jet fuel, asphalt, petrochemicals, lubricants, and other refined petroleum products. We sell our refinedpetroleum products in both the wholesale rack and bulk markets, and approximately 7,400 outlets carry our brand names in the U.S.,Canada, the U.K., and Ireland. Most of our logistics assets support our refining operations, and some of these assets are owned byValero Energy Partners LP (VLP), a midstream master limited partnership majority owned by us. We also own 11 ethanol plants in theMid-Continent region of the U.S. with a combined production capacity of approximately 1.45 billion gallons per year. We sell ourethanol in the wholesale bulk market, and some of our logistics assets support our ethanol operations.AVAILABLE INFORMATIONOur website address is www.valero.com. Information on our website is not part of this report. Our annual reports on Form 10-K,quarterly reports on Form 10-Q, and current reports on Form 8-K, and any amendments to those reports, filed with (or furnished to) theU.S. Securities and Exchange Commission (SEC) are available on our website (under “Investors”) free of charge, soon after we file orfurnish such material. In this same location, we also post our corporate governance guidelines, codes of ethics, and the charters of thecommittees of our board of directors. These documents are available in print to any stockholder that makes a written request to ValeroEnergy Corporation, Attn: Secretary, P.O. Box 696000, San Antonio, Texas 78269-6000.1Table of ContentsSEGMENTSEffective January 1, 2017, we revised our reportable segments to align with certain changes in how our chief operating decision makermanages and allocates resources to our business. Accordingly, we created a new reportable segment — VLP. The results of the VLPsegment, which include the results of our majority-owned master limited partnership referred to by the same name, were transferredfrom the refining segment. The segment information included herein has been retrospectively adjusted for the segment changesdescribed above.As a result, we have three reportable segments as follows:•Refining segment includes our refining operations, the associated marketing activities, and certain logistics assets, which are notowned by VLP, that support our refining operations;•Ethanol segment includes our ethanol operations, the associated marketing activities, and logistics assets that support ourethanol operations; and•VLP segment includes the results of VLP, which provides transportation and terminaling services to our refining segment.Financial information about our segments is presented in Note 16 of Notes to Consolidated Financial Statements and is incorporatedherein by reference.2Table of ContentsVALERO’S OPERATIONSREFININGRefining OperationsAs of December 31, 2017, our refining operations included 15 petroleum refineries in the U.S., Canada, and the U.K., with a combinedtotal throughput capacity of approximately 3.1 million barrels per day (BPD). The following table presents the locations of theserefineries and their approximate feedstock throughput capacities as of December 31, 2017.Refinery Location ThroughputCapacity (a)(BPD)U.S. Gulf Coast: Port Arthur Texas 395,000Corpus Christi (b) Texas 370,000St. Charles Louisiana 340,000Texas City Texas 260,000Houston Texas 235,000Meraux Louisiana 135,000Three Rivers Texas 100,000 1,835,000 U.S. Mid-Continent: McKee Texas 200,000Memphis Tennessee 195,000Ardmore Oklahoma 90,000 485,000 North Atlantic: Pembroke Wales, U.K. 270,000Quebec City Quebec, Canada 235,000 505,000 U.S. West Coast: Benicia California 170,000Wilmington California 135,000 305,000Total 3,130,000(a)“Throughput capacity” represents estimated capacity for processing crude oil, inter-mediates, and other feedstocks. Total estimated crude oil capacity isapproximately 2.6 million BPD.(b)Represents the combined capacities of two refineries – the Corpus Christi East and Corpus Christi West Refineries.3Table of ContentsTotal Refining SystemThe following table presents the percentages of principal charges and yields (on a combined basis) for all of our refineries for 2017,during which period our total combined throughput volumes averaged approximately 2.9 million BPD.Combined Total Refining System Charges and YieldsCharges: sour crude oil32% sweet crude oil45% residual fuel oil7% other feedstocks5% blendstocks11%Yields: gasolines and blendstocks48% distillates38% other products (primarily includes petrochemicals, gas oils, No. 6 fueloil, petroleum coke, sulfur and asphalt)14%U.S. Gulf CoastThe following table presents the percentages of principal charges and yields (on a combined basis) for the eight refineries in the U.S.Gulf Coast region for 2017, during which period total throughput volumes averaged approximately 1.7 million BPD.Combined U.S. Gulf Coast Region Charges and YieldsCharges: sour crude oil42% sweet crude oil28% residual fuel oil11% other feedstocks7% blendstocks12%Yields: gasolines and blendstocks45% distillates39% other products (primarily includes petrochemicals, gas oils, No. 6 fueloil, petroleum coke, sulfur and asphalt)16%Port Arthur Refinery. Our Port Arthur Refinery is located on the Texas Gulf Coast approximately 90 miles east of Houston. The refineryprocesses heavy sour crude oils and other feedstocks into gasoline, diesel, and jet fuel. The refinery receives crude oil by rail, marinedocks, and pipelines. Finished products are distributed into the Colonial, Explorer, and other pipelines and across the refinery docksinto ships or barges.Corpus Christi East and West Refineries. Our Corpus Christi East and West Refineries are located on the Texas Gulf Coast along theCorpus Christi Ship Channel. The East Refinery processes sour crude oil, and the West Refinery processes sweet crude oil, sour crudeoil, and residual fuel oil. The feedstocks are delivered by tanker or barge via deepwater docking facilities along the Corpus Christi ShipChannel, and West Texas or South Texas crude oil is delivered via pipelines. The refineries’ physical locations allow for the transfer4Table of Contentsof various feedstocks and blending components between them. The refineries produce gasoline, aromatics, jet fuel, diesel, and asphalt.Truck racks service local markets for gasoline, diesel, jet fuels, liquefied petroleum gases, and asphalt. These and other finishedproducts are also distributed by ship or barge across docks and third-party pipelines.St. Charles Refinery. Our St. Charles Refinery is located approximately 25 miles west of New Orleans along the Mississippi River. Therefinery processes sour crude oils and other feedstocks into gasoline and diesel. The refinery receives crude oil over docks and hasaccess to the Louisiana Offshore Oil Port. Finished products can be shipped over these docks or through our Parkway pipeline or theBengal pipeline, which ultimately provide access to the Plantation or Colonial pipeline networks.Texas City Refinery. Our Texas City Refinery is located southeast of Houston on the Texas City Ship Channel. The refinery processescrude oils into gasoline, diesel, and jet fuel. The refinery receives its feedstocks by pipeline and by ship or barge via deepwater dockingfacilities along the Texas City Ship Channel. The refinery uses ships and barges, as well as the Colonial, Explorer, and other pipelinesfor distribution of its products.Houston Refinery. Our Houston Refinery is located on the Houston Ship Channel. It processes a mix of crude and intermediate oils intogasoline, jet fuel, and diesel. The refinery receives its feedstocks by tankers or barges at deepwater docking facilities along the HoustonShip Channel and by various interconnecting pipelines. The majority of its finished products are delivered to local, mid-continent U.S.,and northeastern U.S. markets through various pipelines, including the Colonial and Explorer pipelines.Meraux Refinery. Our Meraux Refinery is located approximately 15 miles southeast of New Orleans along the Mississippi River. Therefinery processes sour and sweet crude oils into gasoline, diesel, jet fuel, and high sulfur fuel oil. The refinery receives crude oil at itsdock and has access to the Louisiana Offshore Oil Port. Finished products can be shipped from the refinery’s dock or through theColonial pipeline. The refinery is located about 40 miles from our St. Charles Refinery, allowing for integration of feedstocks andrefined petroleum product blending.Three Rivers Refinery. Our Three Rivers Refinery is located in South Texas between Corpus Christi and San Antonio. It processes sweetand sour crude oils into gasoline, distillates, and aromatics. The refinery has access to crude oil from sources outside the U.S. deliveredto the Texas Gulf Coast at Corpus Christi, as well as crude oil from local sources through third-party pipelines and trucks. The refinerydistributes its refined petroleum products primarily through third-party pipelines.5Table of ContentsU.S. Mid-ContinentThe following table presents the percentages of principal charges and yields (on a combined basis) for the three refineries in the U.S.Mid-Continent region for 2017, during which period total throughput volumes averaged approximately 457,000 BPD.Combined U.S. Mid-Continent Region Charges and YieldsCharges: sour crude oil4% sweet crude oil89% blendstocks7%Yields: gasolines and blendstocks54% distillates36% other products (primarily includes petrochemicals, gas oils, No. 6 fueloil, and asphalt)10%McKee Refinery. Our McKee Refinery is located in the Texas Panhandle. It processes primarily sweet crude oils into gasoline, diesel, jetfuels, and asphalt. The refinery has access to local and Permian Basin crude oil sources via third-party pipelines. The refinery distributesits products primarily via third-party pipelines to markets in Texas, New Mexico, Arizona, Colorado, and Oklahoma.Memphis Refinery. Our Memphis Refinery is located in Tennessee along the Mississippi River. It processes primarily sweet crude oils.Most of its production is gasoline, diesel, and jet fuels. Crude oil supply is primarily from Cushing over the Diamond pipeline, whichbegan operations in November 2017. Crude oil can be received, along with other feedstocks, via barge. Most of the refinery’s productsare distributed via truck rack and barges.Ardmore Refinery. Our Ardmore Refinery is located in Oklahoma, approximately 100 miles south of Oklahoma City. It processesmedium sour and sweet crude oils into gasoline, diesel, and asphalt. The refinery receives local crude oil and feedstock supply viathird-party pipelines. Refined petroleum products are transported to market via rail, trucks, and the Magellan pipeline system.6Table of ContentsNorth AtlanticThe following table presents the percentages of principal charges and yields (on a combined basis) for the two refineries in the NorthAtlantic region for 2017, during which period total throughput volumes averaged approximately 491,000 BPD.Combined North Atlantic Region Charges and YieldsCharges: sour crude oil1% sweet crude oil84% residual fuel oil5% blendstocks10%Yields: gasolines and blendstocks45% distillates42% other products (primarily includes petrochemicals, gas oils, andNo. 6 fuel oil)13%Pembroke Refinery. Our Pembroke Refinery is located in the County of Pembrokeshire in southwest Wales, U.K. The refinery processesprimarily sweet crude oils into gasoline, diesel, jet fuel, heating oil, and low-sulfur fuel oil. The refinery receives all of its feedstocksand delivers the majority of its products by ship and barge via deepwater docking facilities along the Milford Haven Waterway, with itsremaining products being delivered by our Mainline pipeline system and by trucks.Quebec City Refinery. Our Quebec City Refinery is located in Lévis, Canada (near Quebec City). It processes sweet crude oils intogasoline, diesel, jet fuel, heating oil, and low-sulfur fuel oil. The refinery receives crude oil by ship at its deepwater dock on theSt. Lawrence River or by pipeline or ship from western Canada. The refinery transports its products through our pipeline fromQuebec City to our terminal in Montreal and to various other terminals throughout eastern Canada by rail, ships, trucks, and third-partypipelines.U.S. West CoastThe following table presents the percentages of principal charges and yields (on a combined basis) for the two refineries in the U.S.West Coast region for 2017, during which period total throughput volumes averaged approximately 257,000 BPD.Combined U.S. West Coast Region Charges and YieldsCharges: sour crude oil65% sweet crude oil7% other feedstocks13% blendstocks15%Yields: gasolines and blendstocks59% distillates25% other products (primarily includes gas oil, No. 6 fuel oil,petroleum coke, sulfur and asphalt)16%7Table of ContentsBenicia Refinery. Our Benicia Refinery is located northeast of San Francisco on the Carquinez Straits of San Francisco Bay. It processessour crude oils into gasoline, diesel, jet fuel, and asphalt. Gasoline production is primarily California Reformulated Blendstock Gasolinefor Oxygenate Blending (CARBOB), which meets California Air Resource Board (CARB) specifications when blended with ethanol.The refinery receives crude oil feedstocks via a marine dock and crude oil pipelines connected to a southern California crude oildelivery system. Most of the refinery’s products are distributed via pipeline and truck rack into northern California markets.Wilmington Refinery. Our Wilmington Refinery is located near Los Angeles, California. The refinery processes a blend of heavy andhigh-sulfur crude oils. The refinery produces CARBOB gasoline, diesel, CARB diesel, jet fuel, and asphalt. The refinery is connectedby pipeline to marine terminals and associated dock facilities that can move and store crude oil and other feedstocks. Refined petroleumproducts are distributed via pipeline systems to various third-party terminals in southern California, Nevada, and Arizona.Feedstock SupplyOur crude oil feedstocks are purchased through a combination of term and spot contracts. Our term supply agreements are at market-related prices and are purchased directly or indirectly from various national oil companies as well as international and U.S. oilcompanies. The contracts generally permit the parties to amend the contracts (or terminate them), effective as of the next scheduledrenewal date, by giving the other party proper notice within a prescribed period of time (e.g., 60 days, 6 months) before expiration ofthe current term. The majority of the crude oil purchased under our term contracts is purchased at the producer’s official stated price(i.e., the “market” price established by the seller for all purchasers) and not at a negotiated price specific to us.MarketingOverviewWe sell refined petroleum products in both the wholesale rack and bulk markets. These sales include refined petroleum products thatare manufactured in our refining operations, as well as refined petroleum products purchased or received on exchange from thirdparties. Most of our refineries have access to marine transportation facilities and interconnect with common-carrier pipeline systems,allowing us to sell products in the U.S., Canada, the U.K., and other countries.Wholesale Rack SalesWe sell our gasoline and distillate products, as well as other products, such as asphalt, lube oils, and natural gas liquids (NGLs), on awholesale basis through an extensive rack marketing network. The principal purchasers of our refined petroleum products fromterminal truck racks are wholesalers, distributors, retailers, and truck-delivered end users throughout the U.S., Canada, the U.K., andIreland.The majority of our rack volume is sold through unbranded channels. The remainder is sold to distributors and dealers that are membersof the Valero-brand family that operate 5,631 branded sites in the U.S., 923 branded sites in the U.K. and Ireland, and 839 brandedsites in Canada as of December 31, 2017. These sites are independently owned and are supplied by us under multi-year contracts. Forbranded sites, products are sold under the Valero®, Beacon®, Diamond Shamrock®, and Shamrock® brands in the U.S., the Texaco®brand in the U.K. and Ireland, and the Ultramar® brand in Canada.Bulk SalesWe also sell our gasoline and distillate products, as well as other products, such as asphalt, petrochemicals, and NGLs, through bulksales channels in the U.S. and international markets. Our bulk sales are made to8Table of Contentsvarious oil companies, traders, and bulk end-users, such as railroads, airlines, and utilities. Our bulk sales are transported primarily bypipeline, barges, and tankers to major tank farms and trading hubs.We also enter into refined petroleum product exchange and purchase agreements. These agreements help minimize transportation costs,optimize refinery utilization, balance refined petroleum product availability, broaden geographic distribution, and provide access tomarkets not connected to our refined-product pipeline systems. Exchange agreements provide for the delivery of refined petroleumproducts by us to unaffiliated companies at our and third-parties’ terminals in exchange for delivery of a similar amount of refinedpetroleum products to us by these unaffiliated companies at specified locations. Purchase agreements involve our purchase of refinedpetroleum products from third parties with delivery occurring at specified locations.LogisticsWe own logistics assets (crude oil pipelines, refined petroleum product pipelines, terminals, tanks, marine docks, truck rack bays, andother assets) that support our refining operations, and these assets are not owned by VLP. See discussion of the VLP segment on page11.9Table of ContentsETHANOLWe own 11 ethanol plants with a combined ethanol production capacity of 1.45 billion gallons per year. Our ethanol plants are dry millfacilities(a) that process corn to produce ethanol, distillers grains, and corn oil(b). We source our corn supply from local farmers andcommercial elevators. Our facilities receive corn primarily by rail and truck. We publish on our website a corn bid for local farmers andcooperative dealers to facilitate corn supply transactions.We sell our ethanol primarily to refiners and gasoline blenders under term and spot contracts in bulk markets such as New York,Chicago, the U.S. Gulf Coast, Florida, and the U.S. West Coast. We ship our dry distillers grains (DDGs) by truck or rail primarily toanimal feed customers in the U.S. and Mexico. We also sell modified distillers grains locally at our plant sites, and corn oil by truck orrail. We distribute our ethanol through logistics assets, which include railcars owned by us.The following table presents the locations of our ethanol plants, their approximate annual production capacities for ethanol (in millionsof gallons) and DDGs (in tons), and their approximate corn processing capacities (in millions of bushels).State City EthanolProductionCapacity Productionof DDGs CornProcessedIndiana Linden 135 355,000 47 Mount Vernon 100 263,000 35Iowa Albert City 135 355,000 47 Charles City 140 368,000 49 Fort Dodge 140 368,000 49 Hartley 140 368,000 49Minnesota Welcome 140 368,000 49Nebraska Albion 135 355,000 47Ohio Bloomingburg 135 355,000 47South Dakota Aurora 140 368,000 49Wisconsin Jefferson 110 352,000 41Total 1,450 3,875,000 509The combined production of ethanol from our plants averaged 4.0 million gallons per day for 2017.________________________(a)Ethanol is commercially produced using either the wet mill or dry mill process. Wet milling involves separating the grain kernel into its component parts(germ, fiber, protein, and starch) prior to fermentation. In the dry mill process, the entire grain kernel is ground into flour. The starch in the flour isconverted to ethanol during the fermentation process, creating carbon dioxide and distillers grains.(b)During fermentation, nearly all of the starch in the grain is converted into ethanol and carbon dioxide, while the remaining nutrients (proteins, fats,minerals, and vitamins) are concentrated to yield corn oil, modified distillers grains, or, after further drying, dried distillers grains. Distillers grainsgenerally are an economical partial replacement for corn and soybeans in feeds for cattle, swine, and poultry. Corn oil is produced as fuel grade and feedgrade (not for human consumption), and is sold primarily as a feedstock for biodiesel or renewable diesel production with a smaller percentage sold intoanimal feed markets.10Table of ContentsVLPVLP is a publicly traded master limited partnership formed by us in July 2013 to own, operate, develop, and acquire crude oil andrefined petroleum products pipelines, terminals, and other transportation and logistics assets. VLP’s assets include crude oil and refinedpetroleum products pipeline and terminal systems in the U.S. Gulf Coast and U.S. Mid-Continent regions that provide transportation andterminaling services to our refining segment and are integral to the operations of our Ardmore, Corpus Christi, Houston, McKee,Memphis, Meraux, Port Arthur, St. Charles, and Three Rivers Refineries. VLP’s common units, representing limited partner interests,are traded on the NYSE under the symbol “VLP.” VLP is discussed more fully in Note 11 of Notes to Consolidated FinancialStatements.11Table of ContentsThe following table summarizes information with respect to VLP’s pipelines:Pipeline Diameter(inches) Length(miles) ThroughputCapacity(thousand BPD) Commodity AssociatedValeroRefinery SignificantThird-partySystem ConnectionsArdmore logistics system Hewitt segment of RedRiver crude oil pipeline 16 138 60(a) crude oil Ardmore Plains Red River, Plains CushingWynnewood refinedproducts pipeline 12 30 90 refinedpetroleumproducts Ardmore Magellan CentralMcKee logistics system McKee crude system multiplesegments 145 72 crude oil McKee —McKee products system McKee to El Paso pipeline 10 408 21(b) refinedpetroleumproducts McKee —SFPP pipeline connection 16, 8 12 33(c) refinedpetroleumproducts McKee Kinder MorganSFPP SystemMemphis logistics system(d) Collierville crude system Collierville pipeline 10-20 52 210 crude oil Memphis Capline; Diamond (e)Memphis products system Memphis Airport pipeline system 6 11 20 jet fuel Memphis Memphis International AirportShorthorn pipeline system 14, 12 9 120 refinedpetroleumproducts Memphis Exxon MemphisPort Arthur logistics system Lucas crude system Lucas pipeline 30 12 400 crude oil Port Arthur Sunoco Logistics Nederland; EnterpriseBeaumont; Cameron Highway;TransCanada Cushing MarketLink;SeawayNederland pipeline 32 5 600 crude oil Port Arthur Sunoco Logistics NederlandPort Arthur products system 12-10 pipeline 12, 10 13 60 refinedpetroleumproducts Port Arthur Sunoco Logistics MagTex; Enterprise TE Products,Enterprise Beaumont20-inch diesel pipeline 20 3 216 diesel Port Arthur Explorer; Colonial20-inch gasoline pipeline 20 4 144 gasoline Port Arthur Explorer; ColonialSt. Charles logistics system Parkway pipeline 16 140 110 refinedpetroleumproducts St. Charles Plantation; ColonialThree Rivers logistics system Three Rivers crude system 12 3 110 crude oil Three Rivers Harvest Arrowhead; Plains Gardendale; EOG Eagle Ford West_______________________(a)Capacity shown represents VLP’s 40 percent undivided interest in the pipeline segment. Total capacity for the pipeline segment is 150,000 BPD.(b)Capacity shown represents VLP’s 33⅓ percent undivided interest in the pipeline. Total capacity for the pipeline is 63,000 BPD.(c)Capacity shown represents VLP’s 33⅓ percent undivided interest in the pipeline connection. Total capacity for the pipeline connection is 98,400 BPD.(d)Portions of VLP’s Memphis logistics system pipelines are owned by Memphis Light, Gas and Water (MLGW), but they are operated and maintained exclusively by VLP underlong-term arrangements with MLGW.(e)The Diamond pipeline is owned 50 percent by Valero and 50 percent by Plains All American Pipeline, L.P.12Table of ContentsThe following table summarizes information with respect to VLP’s terminals:Terminal Tank StorageCapacity(thousands ofbarrels) ThroughputCapacity(thousandBPD) Commodity AssociatedValeroRefinery SignificantThird-partySystem ConnectionsArdmore logistics system Hewitt Station tanks 300 — crude oil Ardmore Plains Red RiverWynnewood terminal 180 — refined petroleumproducts Ardmore Magellan CentralCorpus Christi logistics system Corpus Christi East terminal 6,241 — crude oil and refinedpetroleum products Corpus Christi East Eagle Ford Pipeline LLC; NuStarNorth Beach terminal, Eagle Fordpipelines & South Texas pipelinenetworkCorpus Christi West terminal 3,835 — crude oil and refinedpetroleum products Corpus ChristiWest (same as Corpus Christi Eastterminal)Houston logistics system Houston terminal 3,642 — crude oil and refinedpetroleum products Houston HFOTCO; Magellan crude; Seaway;Kinder Morgan Pasadena & GalenaPark; Magellan East Houston &Galena ParkMcKee logistics system McKee crude system Various terminals 240 — crude oil McKee —McKee products system El Paso terminal 166 (a) — refined petroleumproducts McKee Kinder MorganSFPP SystemEl Paso terminal truck rack — 10 (b) refined petroleumproducts McKee —McKee terminal 4,400 — crude oil and refinedpetroleum products McKee NuStar (several);NuStar/Phillips DenverMemphis logistics system Collierville crude system Collierville terminal 975 — crude oil Memphis CaplineSt. James crude tank 330 — crude oil Memphis CaplineMemphis products system Memphis truck rack 8 110 refined petroleumproducts Memphis —West Memphis terminal 1,080 — refined petroleumproducts Memphis Exxon Memphis;Enterprise TE ProductsWest Memphis terminal dock — 4 (c) refined petroleumproducts Memphis —West Memphis terminal truckrack — 50 refined petroleumproducts Memphis —Meraux logistics system Meraux terminal 3,900 — crude oil and refinedpetroleum products Meraux LOOP; CAM; Plantation; Colonial____________________________ See footnotes on page 14.13Table of ContentsTerminal Tank StorageCapacity(thousands ofbarrels) ThroughputCapacity(thousandBPD) Commodity AssociatedValeroRefinery SignificantThird-partySystem ConnectionsPort Arthur logistics system Lucas crude system Lucas terminal 1,915 — crude oil Port Arthur Sunoco Logistics Nederland;Enterprise Beaumont;Cameron Highway; TransCanada Cushing MarketLink; SeawaySeaway connection — 750 crude oil Port Arthur SeawayTransCanada connection — 400 crude oil Port Arthur TransCanada Cushing MarketLinkPort Arthur products system El Vista terminal 1,210 — gasoline Port Arthur Explorer; ColonialPAPS terminal 1,144 — diesel Port Arthur Explorer; ColonialPort Arthur terminal 8,500 — crude oil and refinedpetroleum products Port Arthur Sunoco Logistics Nederland;Explorer; Colonial; Sunoco LogisticsMagTex; Cameron Highway;TransCanada Cushing MarketLink;Enterprise BeaumontSt. Charles logistics system St. Charles terminal 10,004 — crude oil and refinedpetroleum products St. Charles LOOP; CAM; Plantation; ColonialThree Rivers logistics system Three Rivers terminal 2,250 — crude oil and refinedpetroleum products Three Rivers NuStar South Texas; Harvest Arrowhead;Plains Gardendale; EOG Eagle Ford West____________________________(a)Capacity shown represents VLP’s 33⅓ percent undivided interest in the terminal. Total storage capacity is 499,000 barrels.(b)Capacity shown represents VLP’s 33⅓ percent undivided interest in the truck rack. Total capacity is 30,000 BPD.(c)Dock throughput is reflected in thousands of barrels per hour.14Table of ContentsENVIRONMENTAL MATTERSWe incorporate by reference into this Item the environmental disclosures contained in the following sections of this report:•Item 1A, “Risk Factors”—Compliance with and changes in environmental laws, including proposed climate change lawsand regulations, could adversely affect our performance;•Item 1A, “Risk Factors”—Compliance with the U.S. Environmental Protection Agency Renewable Fuel Standard couldadversely affect our performance;•Item 1A, “Risk Factors”—We may incur additional costs as a result of our use of rail cars for the transportation of crudeoil and the products that we manufacture;•Item 3, “Legal Proceedings” under the caption “Environmental Enforcement Matters,” and;•Item 8, “Financial Statements and Supplementary Data” in Note 7 of Notes to Consolidated Financial Statements and Note 9of Notes to Consolidated Financial Statements under the caption “Environmental Matters.”Capital Expenditures Attributable to Compliance with Environmental Regulations. In 2017, our capital expenditures attributable tocompliance with environmental regulations were $145 million, and they are currently estimated to be $290 million for 2018 and$123 million for 2019. The estimates for 2018 and 2019 do not include amounts related to capital investments at our facilities thatmanagement has deemed to be strategic investments. These amounts could materially change as a result of governmental andregulatory actions.PROPERTIESOur principal properties are described above under the caption “Valero’s Operations,” and that information is incorporated herein byreference. We believe that our properties and facilities are generally adequate for our operations and that our facilities are maintained ina good state of repair. As of December 31, 2017, we were the lessee under a number of cancelable and noncancelable leases for certainproperties. Our leases are discussed more fully in Notes 8 and 9 of Notes to Consolidated Financial Statements. Financial informationabout our properties is presented in Note 5 of Notes to Consolidated Financial Statements and is incorporated herein by reference.Our patents relating to our refining operations are not material to us as a whole. The trademarks and tradenames under which weconduct our branded wholesale business — Valero®, Diamond Shamrock®, Shamrock®, Ultramar®, Beacon®, and Texaco®— and othertrademarks employed in the marketing of petroleum products are integral to our wholesale rack marketing operations.15Table of ContentsITEM 1A. RISK FACTORSYou should carefully consider the following risk factors in addition to the other information included in this report. Each of these riskfactors could adversely affect our business, operating results, and/or financial condition, as well as adversely affect the value of aninvestment in our common stock.Our financial results are affected by volatile refining margins, which are dependent upon factors beyond our control, including theprice of crude oil and the market price at which we can sell refined petroleum products.Our financial results are primarily affected by the relationship, or margin, between refined petroleum product prices and the prices forcrude oil and other feedstocks. Historically, refining margins have been volatile, and we believe they will continue to be volatile in thefuture. Our cost to acquire feedstocks and the price at which we can ultimately sell refined petroleum products depend upon severalfactors beyond our control, including regional and global supply of and demand for crude oil, gasoline, diesel, and other feedstocksand refined petroleum products. These in turn depend on, among other things, the availability and quantity of imports, the productionlevels of U.S. and international suppliers, levels of refined petroleum product inventories, productivity and growth (or the lack thereof)of U.S. and global economies, U.S. relationships with foreign governments, political affairs, and the extent of governmental regulation.Some of these factors can vary by region and may change quickly, adding to market volatility, while others may have longer-termeffects. The longer-term effects of these and other factors on refining and marketing margins are uncertain. We do not produce crude oiland must purchase all of the crude oil we refine. We may purchase our crude oil and other refinery feedstocks long before we refinethem and sell the refined petroleum products. Price level changes during the period between purchasing feedstocks and selling therefined petroleum products from these feedstocks could have a significant effect on our financial results. A decline in market pricesmay negatively impact the carrying value of our inventories.Economic turmoil and political unrest or hostilities, including the threat of future terrorist attacks, could affect the economies of the U.S.and other countries. Lower levels of economic activity could result in declines in energy consumption, including declines in thedemand for and consumption of our refined petroleum products, which could cause our revenues and margins to decline and limit ourfuture growth prospects.Refining margins are also significantly impacted by additional refinery conversion capacity through the expansion of existing refineriesor the construction of new refineries. Worldwide refining capacity expansions may result in refining production capability exceedingrefined petroleum product demand, which would have an adverse effect on refining margins.A significant portion of our profitability is derived from the ability to purchase and process crude oil feedstocks that historically havebeen cheaper than benchmark crude oils, such as Louisiana Light Sweet (LLS) and Brent crude oils. These crude oil feedstockdifferentials vary significantly depending on overall economic conditions and trends and conditions within the markets for crude oil andrefined petroleum products, and they could decline in the future, which would have a negative impact on our results of operations.Compliance with and changes in environmental laws, including proposed climate change laws and regulations, could adversely affectour performance.The principal environmental risks associated with our operations are emissions into the air and releases into the soil, surface water, orgroundwater. Our operations are subject to extensive environmental laws and regulations, including those relating to the discharge ofmaterials into the environment, waste management,16Table of Contentspollution prevention measures, greenhouse gas (GHG) emissions, and characteristics and composition of fuels, including gasoline anddiesel. Certain of these laws and regulations could impose obligations to conduct assessment or remediation efforts at our facilities aswell as at formerly owned properties or third-party sites where we have taken wastes for disposal or where our wastes have migrated.Environmental laws and regulations also may impose liability on us for the conduct of third parties, or for actions that complied withapplicable requirements when taken, regardless of negligence or fault. If we violate or fail to comply with these laws and regulations,we could be fined or otherwise sanctioned.Because environmental laws and regulations are becoming more stringent and new environmental laws and regulations arecontinuously being enacted or proposed, such as those relating to GHG emissions and climate change, the level of expendituresrequired for environmental matters could increase in the future. Current and future legislative action and regulatory initiatives couldresult in changes to operating permits, material changes in operations, increased capital expenditures and operating costs, increasedcosts of the goods we sell, and decreased demand for our products that cannot be assessed with certainty at this time. We may berequired to make expenditures to modify operations, discontinue use of certain process units, or install pollution control equipment thatcould materially and adversely affect our business, financial condition, results of operations, and liquidity.For example, the U.S. Environmental Protection Agency (EPA) recently adopted the Residual Risk and Technology Review Rule (RTR)adding new standards for air toxic emissions, among other requirements. Emerging rules and permitting requirements implementingthese revised standards may require us to install more stringent controls at our facilities, which may result in increased capitalexpenditures. Governmental regulations regarding GHG emissions and low carbon fuel standards could result in increased compliancecosts, additional operating restrictions or permitting delays for our business, and an increase in the cost of, and reduction in demand for,the products we produce, which could have a material adverse effect on our financial position, results of operations, and liquidity.In addition, in 2015, the U.S., Canada, and the U.K. participated in the United Nations Conference on Climate Change, which led to thecreation of the Paris Agreement. The Paris Agreement, which was signed by the U.S. in April 2016, requires countries to review and“represent a progression” in their intended nationally determined contributions (which set GHG emission reduction goals) every fiveyears beginning in 2020. While the current U.S. administration announced its intent to withdraw from the Paris Agreement in June2017, there are no guarantees that it will not be implemented in the U.S., or in part by U.S. states or local governments. Restrictions onemissions of methane or carbon dioxide that have been or may be imposed in various U.S. states or at the U.S. federal level or in othercountries could adversely affect the oil and gas industry.Severe weather events may have an adverse effect on our assets and operations.Some members within the scientific community believe that the increasing concentrations of greenhouse gas emissions in the Earth’satmosphere, among other reasons, may produce climate changes that have significant physical effects, such as increased frequency andseverity of storms, droughts and floods and other climatic events. If any such climatic events were to occur, they could have an adverseeffect on our assets and operations.17Table of ContentsCompliance with the U.S. Environmental Protection Agency Renewable Fuel Standard could adversely affect our performance.The U.S. EPA has implemented a Renewable Fuel Standard (RFS) pursuant to the Energy Policy Act of 2005 and the EnergyIndependence and Security Act of 2007. The RFS program sets annual quotas for the quantity of renewable fuels (such as ethanol) thatmust be blended into transportation fuels consumed in the U.S. A Renewable Identification Number (RIN) is assigned to each gallon ofrenewable fuel produced in or imported into the U.S. As a producer of petroleum-based transportation fuels, we are obligated to blendrenewable fuels into the products we produce at a rate that is at least commensurate to the U.S. EPA’s quota and, to the extent we donot, we must purchase RINs in the open market to satisfy our obligation under the RFS program.We are exposed to the volatility in the market price of RINs. We cannot predict the future prices of RINs. RINs prices are dependentupon a variety of factors, including U.S. EPA regulations, the availability of RINs for purchase, and levels of transportation fuelsproduced, which can vary significantly from quarter to quarter. If sufficient RINs are unavailable for purchase or if we have to pay asignificantly higher price for RINs, or if we are otherwise unable to meet the U.S. EPA’s RFS mandates, our results of operations andcash flows could be adversely affected.Disruption of our ability to obtain crude oil could adversely affect our operations.A significant portion of our feedstock requirements is satisfied through supplies originating in the Middle East, Africa, Asia, NorthAmerica, and South America. We are, therefore, subject to the political, geographic, and economic risks attendant to doing businesswith suppliers located in, and supplies originating from, these areas. If one or more of our supply contracts were terminated, or ifpolitical events disrupt our traditional crude oil supply, we believe that adequate alternative supplies of crude oil would be available, butit is possible that we would be unable to find alternative sources of supply. If we are unable to obtain adequate crude oil volumes or areable to obtain such volumes only at unfavorable prices, our results of operations could be materially adversely affected, includingreduced sales volumes of refined petroleum products or reduced margins as a result of higher crude oil costs.In addition, the U.S. government can prevent or restrict us from doing business in or with other countries. These restrictions, and thoseof other governments, could limit our ability to gain access to business opportunities in various countries. Actions by both the U.S. andother countries have affected our operations in the past and will continue to do so in the future.Any attempt by the U.S. government to withdraw from or materially modify existing international trade agreements could adverselyaffect our business, financial condition and results of operations.The current U.S. administration has questioned certain existing and proposed trade agreements, such as the North American Free TradeAgreement, and has withdrawn the U.S. from others such as the Trans-Pacific Partnership. The current U.S. administration has alsoraised the possibility of greater restrictions on trade generally, and significant increases on tariffs on goods imported into the U.S.Changes in U.S. social, political, regulatory and economic conditions or in laws and policies governing foreign trade, manufacturing,development and investment could adversely affect our business. For example, the imposition of tariffs or other trade barriers with othercountries could affect our ability to obtain feedstocks from international sources, increase our costs and reduce the competitiveness ofour products.While there is currently a lack of certainty around the likelihood, timing, and details of any such policies and reforms, if the current U.S.administration takes action to withdraw from, or materially modify, existing18Table of Contentsinternational trade agreements, our business, financial condition and results of operations could be adversely affected.We are subject to interruptions and increased costs as a result of our reliance on third-party transportation of crude oil and theproducts that we manufacture.We generally use the services of third parties to transport feedstocks to our facilities and to transport the products we manufacture tomarket. If we experience prolonged interruptions of supply or increases in costs to deliver our products to market, or if the ability of thepipelines, vessels, or railroads to transport feedstocks or products is disrupted because of weather events, accidents, derailment,collision, fire, explosion, governmental regulations, or third-party actions, it could have a material adverse effect on our financialposition, results of operations, and liquidity.We may incur additional costs as a result of our use of rail cars for the transportation of crude oil and the products that wemanufacture.We currently use rail cars for the transportation of some feedstocks to certain of our facilities and for the transportation of some of theproducts we manufacture to their markets. We own and lease rail cars for our operations. Rail transportation is subject to a variety offederal, state, and local regulations. New laws and regulations, and changes in existing laws and regulations, are frequently enacted orproposed, and could result in increased expenditures for compliance, either directly through costs for our owned and leased rail assets,or as passed along to us by rail carriers and operators. For example, in May 2014, the U.S. Department of Transportation (DOT) issuedan emergency order requiring rail carriers to provide certain notifications to state agencies along routes used by trains over a certainlength carrying crude oil. In addition, in November 2014, the Federal Railroad Administration (FRA) issued a final rule regarding safetytraining standards under the Rail Safety Improvement Act of 2008. The rule required each railroad or contractor to develop and submita training program to perform regular oversight and annual written reviews. In May 2015, the Pipeline and Hazardous Materials SafetyAdministration (PHMSA), in coordination with the FRA, issued new final rules for enhanced tank car standards and operational controlsfor high-hazard flammable trains. In August 2016, PHMSA adopted a final rule expanding the requirements and mandating additionalcontrols for enhanced tank cars, as required by the Fixing America’s Surface Transportation (FAST) Act of 2015. While some recentactions—including (1) a December 2017 statement that PHMSA intends to initiate rulemaking to rescind portions of its May 2015 rule;and (2) an April 2017 final rule from FRA that delays certain training-program requirements—have provided some regulatory relief, thegeneral trend has been toward greater regulation. We do not believe recently adopted rules will have a material impact on our financialposition, results of operations, and liquidity, although further changes in law, regulations or industry standards could require us to incuradditional costs to the extent they are applicable to us.Competitors that produce their own supply of feedstocks, own their own retail sites, have greater financial resources, or providealternative energy sources may have a competitive advantage.The refining and marketing industry is highly competitive with respect to both feedstock supply and refined petroleum product markets.We compete with many companies for available supplies of crude oil and other feedstocks and for sites for our refined petroleumproducts. We do not produce any of our crude oil feedstocks and, following the separation of our retail business in 2013, we do nothave a company-owned retail network. Many of our competitors, however, obtain a significant portion of their feedstocks fromcompany-owned production and some have extensive retail sites. Such competitors are at times able to offset losses from refiningoperations with profits from producing or retailing operations, and may be better positioned to withstand periods of depressed refiningmargins or feedstock shortages.19Table of ContentsSome of our competitors also have materially greater financial and other resources than we have. Such competitors have a greaterability to bear the economic risks inherent in all phases of our industry. In addition, we compete with other industries that providealternative means to satisfy the energy and fuel requirements of our industrial, commercial, and individual consumers.Uncertainty and illiquidity in credit and capital markets can impair our ability to obtain credit and financing on acceptable terms, andcan adversely affect the financial strength of our business partners.Our ability to obtain credit and capital depends in large measure on capital markets and liquidity factors that we do not control. Ourability to access credit and capital markets may be restricted at a time when we would like, or need, to access those markets, whichcould have an impact on our flexibility to react to changing economic and business conditions. In addition, the cost and availability ofdebt and equity financing may be adversely impacted by unstable or illiquid market conditions. Protracted uncertainty and illiquidity inthese markets also could have an adverse impact on our lenders, commodity hedging counterparties, or our customers, causing them tofail to meet their obligations to us. In addition, decreased returns on pension fund assets may also materially increase our pensionfunding requirements.Our access to credit and capital markets also depends on the credit ratings assigned to our debt by independent credit rating agencies.We currently maintain investment-grade ratings by Standard & Poor’s Ratings Services, Moody’s Investors Service, and Fitch Ratingson our senior unsecured debt. Ratings from credit agencies are not recommendations to buy, sell, or hold our securities. Each ratingshould be evaluated independently of any other rating. We cannot provide assurance that any of our current ratings will remain in effectfor any given period of time or that a rating will not be lowered or withdrawn entirely by a rating agency if, in its judgment,circumstances so warrant. Specifically, if ratings agencies were to downgrade our long-term rating, particularly below investment grade,our borrowing costs would increase, which could adversely affect our ability to attract potential investors and our funding sources coulddecrease. In addition, we may not be able to obtain favorable credit terms from our suppliers or they may require us to providecollateral, letters of credit, or other forms of security, which would increase our operating costs. As a result, a downgrade belowinvestment grade in our credit ratings could have a material adverse impact on our financial position, results of operations, andliquidity.From time to time, our cash needs may exceed our internally generated cash flow, and our business could be materially and adverselyaffected if we were unable to obtain necessary funds from financing activities. From time to time, we may need to supplement our cashgenerated from operations with proceeds from financing activities. We have existing revolving credit facilities, committed letter ofcredit facilities, and an accounts receivable sales facility to provide us with available financing to meet our ongoing cash needs. Inaddition, we rely on the counterparties to our derivative instruments to fund their obligations under such arrangements. Uncertainty andilliquidity in financial markets may materially impact the ability of the participating financial institutions and other counterparties tofund their commitments to us under our various financing facilities or our derivative instruments, which could have a material adverseeffect on our financial position, results of operations, and liquidity.A significant interruption in one or more of our refineries could adversely affect our business.Our refineries are our principal operating assets. As a result, our operations could be subject to significant interruption if one or more ofour refineries were to experience a major accident or mechanical failure, be damaged by severe weather or other natural or man-madedisaster, such as an act of terrorism, or otherwise be forced to shut down. If any refinery were to experience an interruption inoperations, earnings from the refinery could be materially adversely affected (to the extent not recoverable through insurance) becauseof lost production and repair costs. Significant interruptions in our refining system could also lead to increased volatility in prices forcrude oil feedstocks and refined petroleum products, and could increase instability in20Table of Contentsthe financial and insurance markets, making it more difficult for us to access capital and to obtain insurance coverage that we consideradequate.A significant interruption related to our information technology systems could adversely affect our business.Our information technology systems and network infrastructure may be subject to unauthorized access or attack, which could result in aloss of intellectual property, proprietary information or employee, customer or vendor data; public disclosure of sensitive information;increased costs to prevent, respond to or mitigate cybersecurity events; systems interruption; or the disruption of our businessoperations. A breach could also originate from, or compromise, our customers’ and vendors’ or other third-party networks outside ofour control. A breach may also result in legal claims or proceedings against us by our shareholders, employees, customers and vendors.There can be no assurance that our infrastructure protection technologies and disaster recovery plans can prevent a technology systemsbreach or systems failure, which could have a material adverse effect on our financial position or results of operations. Furthermore, thecontinuing and evolving threat of cyber-attacks has resulted in increased regulatory focus on prevention. To the extent we faceincreased regulatory requirements, we may be required to expend significant additional resources to meet such requirements.Our business may be negatively affected by work stoppages, slowdowns or strikes by our employees, as well as new labor legislationissued by regulators.Workers at some of our refineries are covered by collective bargaining agreements. To the extent we are in negotiations for laboragreements expiring in the future, there is no assurance an agreement will be reached without a strike, work stoppage, or other laboraction. Any prolonged strike, work stoppage, or other labor action could have an adverse effect on our financial condition or results ofoperations. In addition, future federal or state labor legislation could result in labor shortages and higher costs, especially during criticalmaintenance periods.We are subject to operational risks and our insurance may not be sufficient to cover all potential losses arising from operatinghazards. Failure by one or more insurers to honor its coverage commitments for an insured event could materially and adverselyaffect our financial position, results of operations, and liquidity.Our operations are subject to various hazards common to the industry, including explosions, fires, toxic emissions, maritime hazards,and natural catastrophes. As protection against these hazards, we maintain insurance coverage against some, but not all, potential lossesand liabilities. We may not be able to maintain or obtain insurance of the type and amount we desire at reasonable rates. As a result ofmarket conditions, premiums and deductibles for certain of our insurance policies could increase substantially. In some instances,certain insurance could become unavailable or available only for reduced amounts of coverage. For example, coverage for hurricanedamage is very limited, and coverage for terrorism risks includes very broad exclusions. If we were to incur a significant liability forwhich we were not fully insured, it could have a material adverse effect on our financial position, results of operations, and liquidity.Our insurance program includes a number of insurance carriers. Significant disruptions in financial markets could lead to a deteriorationin the financial condition of many financial institutions, including insurance companies. We can make no assurances that we will beable to obtain the full amount of our insurance coverage for insured events.21Table of ContentsLarge capital projects can take many years to complete, and market conditions could deteriorate over time, negatively impactingproject returns.We may engage in capital projects based on the forecasted project economics and level of return on the capital to be employed in theproject. Large-scale projects take many years to complete, and market conditions can change from our forecast. As a result, we may beunable to fully realize our expected returns, which could negatively impact our financial condition, results of operations, and cashflows.Compliance with and changes in tax laws could adversely affect our performance.We are subject to extensive tax liabilities imposed by multiple jurisdictions, including income taxes, indirect taxes (excise/duty,sales/use, gross receipts, and value-added taxes), payroll taxes, franchise taxes, withholding taxes, and ad valorem taxes. New tax lawsand regulations and changes in existing tax laws and regulations are continuously being enacted or proposed that could result inincreased expenditures for tax liabilities in the future. Many of these liabilities are subject to periodic audits by the respective taxingauthority. Subsequent changes to our tax liabilities as a result of these audits may subject us to interest and penalties.On December 22, 2017, tax legislation commonly known as the Tax Cuts and Jobs Act of 2017 (Tax Reform) was enacted. Amongother things, Tax Reform reduces the U.S. corporate income tax rate from 35 percent to 21 percent (beginning in 2018) and implementsa new system of taxation for non-U.S. earnings, including by imposing a one-time tax on the deemed repatriation of undistributedearnings of non-U.S. subsidiaries. Beginning in 2018, Tax Reform also generally will (i) limit our annual deductions for interestexpense to no more than 30 percent of our “adjusted taxable income” (plus 100 percent of our business interest income) for the yearand (ii) permit us to offset only 80 percent (rather than 100 percent) of our taxable income with any net operating losses we generateafter 2017. While we are currently evaluating the effects of Tax Reform, including the one-time deemed repatriation tax and the re-measurement of our deferred tax assets and liabilities, we do not expect that the provisions of Tax Reform, taken as a whole, will haveany adverse impact on our cash tax liabilities, results of operations, or financial condition. In the absence of guidance on variousuncertainties and ambiguities in the application of certain provisions of Tax Reform, we will use what we believe are reasonableinterpretations and assumptions in applying Tax Reform, but it is possible that the Internal Revenue Service (IRS) could issuesubsequent guidance or take positions on audit that differ from our prior interpretations and assumptions, which could adversely impactour cash tax liabilities, results of operations, and financial condition.We may incur losses and additional costs as a result of our forward-contract activities and derivative transactions.We currently use commodity derivative instruments, and we expect to continue their use in the future. If the instruments we use tohedge our exposure to various types of risk are not effective, we may incur losses. In addition, we may be required to incur additionalcosts in connection with future regulation of derivative instruments to the extent it is applicable to us.One of our subsidiaries acts as the general partner of a publicly traded master limited partnership, VLP, which may involve a greaterexposure to legal liability than our historic business operations.One of our subsidiaries acts as the general partner of VLP, a publicly traded master limited partnership. Our control of the generalpartner of VLP may increase the possibility of claims of breach of fiduciary duties, including claims of conflicts of interest, related toVLP. Liability resulting from such claims could have a material adverse effect on our financial position, results of operations, andliquidity.22Table of ContentsITEM 1B. UNRESOLVED STAFF COMMENTSNone.ITEM 3. LEGAL PROCEEDINGSLITIGATIONWe incorporate by reference into this Item our disclosures made in Part II, Item 8 of this report included in Note 9 of Notes toConsolidated Financial Statements under the caption “Litigation Matters.”ENVIRONMENTAL ENFORCEMENT MATTERSWhile it is not possible to predict the outcome of the following environmental proceedings, if any one or more of them were decidedagainst us, we believe that there would be no material effect on our financial position, results of operations, or liquidity. We arereporting these proceedings to comply with SEC regulations, which require us to disclose certain information about proceedings arisingunder federal, state, or local provisions regulating the discharge of materials into the environment or protecting the environment if wereasonably believe that such proceedings will result in monetary sanctions of $100,000 or more.U.S. EPA (Fuels). In our quarterly report on Form 10-Q for the quarter ended March 31, 2017, we reported that we had received aNotice of Violation (NOV) from the U.S. EPA related to violations from the Mobile Source Inspection of 2015, which we believe willresult in penalties in excess of $100,000. We continue to work with the EPA to resolve this matter.People of the State of Illinois, ex rel. v. The Premcor Refining Group Inc., et al., Third Judicial Circuit Court, Madison County (CaseNo. 03-CH-00459, filed May 29, 2003) (Hartford Refinery and terminal). In our quarterly report on Form 10-Q for the quarter endedSeptember 30, 2017, we reported that the Illinois EPA had filed suit against The Premcor Refining Group Inc. alleging violations of airand waste regulations at Premcor’s Hartford, Illinois terminal and closed refinery. We have entered into a Partial Consent Orderresolving various air and permitting violations. Our litigation with other potentially responsible parties (PRPs) and the Illinois EPAcontinues. We continue to assert our various defenses, limitations and potential rights for contribution from the other PRPs.Bay Area Air Quality Management District (BAAQMD) (Benicia Refinery). We currently have multiple outstanding Violation Notices(VNs) issued by the BAAQMD from 2015 to present. These VNs are for various alleged air regulation and air permit violations at ourBenicia Refinery and asphalt plant. In the fourth quarter of 2017, we entered into an agreement with BAAQMD to resolve various VNsand continue to work with the BAAQMD to resolve the remaining VNs.South Coast Air Quality Management District (SCAQMD) (Wilmington Refinery). We currently have multiple NOVs issued by theSCAQMD. These NOVs are for alleged reporting violations and excess emissions at our Wilmington Refinery. We continue to workwith the SCAQMD to resolve these NOVs.Texas Commission on Environmental Quality (TCEQ) (McKee Refinery). In our annual report on Form 10-K for the year endedDecember 31, 2016, we reported that we had received a proposed Agreed Order in the amount of $121,314 from the TCEQ as anadministrative penalty for alleged excess emissions at our McKee Refinery. We continue to work with the TCEQ to resolve this matter.23Table of ContentsITEM 4. MINE SAFETY DISCLOSURESNone.PART IIITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIESOur common stock trades on the NYSE under the symbol “VLO.”As of January 31, 2018, there were 5,483 holders of record of our common stock.The following table shows the high and low sales prices of and dividends declared on our common stock for each quarter of 2017 and2016. Sales Prices of theCommon Stock DividendsPerCommonShareQuarter Ended High Low 2017: December 31 $93.18 $75.84 $0.70September 30 77.77 64.22 0.70June 30 68.39 60.69 0.70March 31 71.40 64.45 0.702016: December 31 $69.85 $52.51 $0.60September 30 58.08 46.88 0.60June 30 64.06 49.91 0.60March 31 72.49 52.55 0.60On January 23, 2018, our board of directors declared a quarterly cash dividend of $0.80 per common share payable March 6, 2018 toholders of record at the close of business on February 13, 2018.Dividends are considered quarterly by the board of directors, may be paid only when approved by the board, and will depend on ourfinancial condition, results of operations, cash flows, prospects, industry conditions, capital requirements, and other factors andrestrictions our board deems relevant. There can be no assurance that we will pay a dividend at the rates we have paid historically, or atall, in the future.24Table of ContentsThe following table discloses purchases of shares of our common stock made by us or on our behalf during the fourth quarter of 2017.Period Total Numberof SharesPurchased AveragePrice Paidper Share Total Number ofShares NotPurchased as Part ofPublicly AnnouncedPlans or Programs (a) Total Number ofShares Purchased asPart of PubliclyAnnounced Plans orPrograms Approximate DollarValue of Shares thatMay Yet Be PurchasedUnder the Plans orPrograms (b)October 2017 515,762 $77.15 292,145 223,617 $1.6 billionNovember 2017 2,186,889 $81.21 216,415 1,970,474 $1.4 billionDecember 2017 2,330,263 $87.76 798 2,329,465 $1.2 billionTotal 5,032,914 $83.83 509,358 4,523,556 $1.2 billion(a)The shares reported in this column represent purchases settled in the fourth quarter of 2017 relating to (i) our purchases of shares in open-markettransactions to meet our obligations under stock-based compensation plans, and (ii) our purchases of shares from our employees and non-employeedirectors in connection with the exercise of stock options, the vesting of restricted stock, and other stock compensation transactions in accordance withthe terms of our stock-based compensation plans.(b)On September 21, 2016, we announced that our board of directors authorized our purchase of up to $2.5 billion of our outstanding common stock (the2016 program) with no expiration date. As of December 31, 2017, we had $1.2 billion remaining available for purchase under the 2016 program. OnJanuary 23, 2018, we announced that our board of directors authorized our purchase of up to an additional $2.5 billion of our outstanding commonstock with no expiration date.25Table of ContentsThe following performance graph is not “soliciting material,” is not deemed filed with the SEC, and is not to be incorporated byreference into any of Valero’s filings under the Securities Act of 1933 or the Securities Exchange Act of 1934, as amended,respectively.This performance graph and the related textual information are based on historical data and are not indicative of future performance.The following line graph compares the cumulative total return(a) on an investment in our common stock against the cumulative totalreturn of the S&P 500 Composite Index and an index of peer companies (that we selected) for the five-year period commencingDecember 31, 2012 and ending December 31, 2017. Our peer group comprises the following nine companies: Andeavor; BP plc; CVREnergy, Inc.; Delek US Holdings, Inc.; HollyFrontier Corporation; Marathon Petroleum Corporation; PBF Energy Inc.; Phillips 66; andRoyal Dutch Shell plc.COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN(a) Among Valero Energy Corporation, the S&P 500 Index,and Peer Group As of December 31, 2012 2013 2014 2015 2016 2017Valero Common Stock$100.00 $165.00 $165.40 $242.80 $244.71 $342.54S&P 500100.00 132.39 150.51 152.59 170.84 208.14Peer Group100.00 121.56 111.98 100.82 119.45 151.71____________________________________(a)Assumes that an investment in Valero common stock and each index was $100 on December 31, 2012. “Cumulative total return” is based on share price appreciation plusreinvestment of dividends from December 31, 2012 through December 31, 2017.26Table of ContentsITEM 6. SELECTED FINANCIAL DATAThe selected financial data for the five-year period ended December 31, 2017 was derived from our audited financial statements. Thefollowing table should be read together with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results ofOperations” and with the historical financial statements and accompanying notes included in Item 8, “Financial Statements andSupplementary Data.”The following summaries are in millions of dollars, except for per share amounts: Year Ended December 31, 2017 (a) 2016 (b) 2015 (c) 2014 2013 (d)Operating revenues$93,980 $75,659 $87,804 $130,844 $138,074Income from continuingoperations4,156 2,417 4,101 3,775 2,722Earnings per commonshare from continuingoperations – assuming dilution9.16 4.94 7.99 6.97 4.96Dividends per common share2.80 2.40 1.70 1.05 0.85Total assets50,158 46,173 44,227 45,355 46,957Debt and capital leaseobligations, less current portion8,750 7,886 7,208 5,747 6,224_________________________________________________(a)Includes the impact of Tax Reform that was enacted on December 22, 2017 and resulted in a net income tax benefit of $1.9 billion ($4.26 per share –assuming dilution) as further described in Note 14 of Notes to Consolidated Financial Statements.(b)Includes a noncash lower of cost or market inventory valuation reserve adjustment that resulted in a net benefit to our results of operations of$747 million as described in Note 4 of Notes to Consolidated Financial Statements.(c)Includes a noncash lower of cost or market inventory valuation reserve adjustment that resulted in a net charge to our results of operations of$790 million.(d)Includes the operations of our retail business prior to its separation from us on May 1, 2013.27Table of ContentsITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSThe following review of our results of operations and financial condition should be read in conjunction with Item 1A, “Risk Factors,”and Item 8, “Financial Statements and Supplementary Data,” included in this report.CAUTIONARY STATEMENT FOR THE PURPOSE OF SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIESLITIGATION REFORM ACT OF 1995This report, 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 of1934. You can identify our forward-looking statements by the words “anticipate,” “believe,” “expect,” “plan,” “intend,” “estimate,”“project,” “projection,” “predict,” “budget,” “forecast,” “goal,” “guidance,” “target,” “could,” “should,” “may,” and similarexpressions.These forward-looking statements include, among other things, statements regarding:•future refining segment margins, including gasoline and distillate margins;•future ethanol 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 expendituresfor environmental and other purposes, and joint venture investments, and the effect of those capital investments on our resultsof operations;•anticipated trends in the supply of and demand for crude oil and other feedstocks and refined petroleum products in the regionswhere 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 industry fundamentals.We based our forward-looking statements on our current expectations, estimates, and projections about ourselves and our industry. Wecaution that these statements are not guarantees of future performance and involve risks, uncertainties, and assumptions that we cannotpredict. In addition, we based many of these forward-looking statements on assumptions about future events that may prove to beinaccurate. Accordingly, our actual results may differ materially from the future performance that we have expressed or forecast in theforward-looking statements. Differences between actual results and any future performance suggested in these forward-lookingstatements 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 refinedpetroleum 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 as gasoline, diesel, jet fuel, petrochemicals, and ethanol;•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 andproduction controls;•the level of consumer demand, including seasonal fluctuations;28Table of Contents•refinery overcapacity or undercapacity;•our ability to successfully integrate any acquired businesses into our operations;•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, andinformation 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 RFS) and GHG emission creditsneeded 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 benefitsprojected 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 and ethanol;•rulings, judgments, or settlements in litigation or other legal or regulatory matters, including unexpected environmentalremediation costs, in excess of any reserves or insurance coverage;•legislative or regulatory action, including the introduction or enactment of legislation or rulemakings by governmentalauthorities, including 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 the U.S. EPA’s regulation ofGHGs, 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, and the Mexicanpeso 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 Item 1A, “Risk Factors” in this report.Any one of these factors, or a combination of these factors, could materially affect our future results of operations and whether anyforward-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 notintend 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 intheir entirety by the foregoing. We undertake no obligation to publicly release any revisions to any such forward-looking statementsthat may be made to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.This report includes references to financial measures that are not defined under U.S. generally accepted accounting principles (GAAP).These non-GAAP financial measures include adjusted net income attributable to Valero stockholders, adjusted operating income (loss),and refining and ethanol segment margin. We have included these non-GAAP financial measures to help facilitate the comparison ofoperating results between periods. See the accompanying financial tables in “RESULTS OF OPERATIONS” and note (d) to the29Table of Contentsaccompanying tables for reconciliations of these non-GAAP financial measures to the most directly comparable U.S. GAAP financialmeasures. Also in note (d), we disclose the reasons why we believe our use of the non-GAAP financial measures provides usefulinformation.OVERVIEW AND OUTLOOKOverviewFor 2017, we reported net income attributable to Valero stockholders of $4.1 billion compared to $2.3 billion for 2016, whichrepresents an increase of $1.8 billion. This increase is primarily due to a $1.9 billion income tax benefit in 2017 resulting from theimplementation of the provisions under Tax Reform, which was enacted on December 22, 2017. See Note 14 of Notes to ConsolidatedFinancial Statements for additional information about Tax Reform and the $1.9 billion benefit recorded by us. Excluding the impact ofTax Reform, adjusted net income attributable to Valero stockholders in 2017 was $2.2 billion. This compares to adjusted net incomeattributable to Valero stockholders of $1.7 billion in 2016, which has been adjusted for the amounts reflected in the table on page 34.The $479 million increase in adjusted net income attributable to Valero stockholders was primarily due to a $779 million increase inadjusted operating income between the years net of the resulting increase in income tax expense.Operating income was $3.6 billion in each of 2017 and 2016. Excluding the amounts reflected in the tables on page 34 from bothyears, adjusted operating income was $3.7 billion in 2017 compared to $2.9 billion in 2016, which represents an increase of$779 million.The $779 million increase in adjusted operating income is primarily due to the following:•Refining segment. Refining segment adjusted operating income increased by $942 million due to higher margins on refinedpetroleum products and higher throughput volumes, partially offset by lower discounts on sour crude oils and other feedstocks,higher cost of biofuel credits, and higher operating expenses (excluding depreciation and amortization expense). This is morefully described on pages 38 through 40.•Ethanol segment. Ethanol segment adjusted operating income decreased by $118 million primarily due to lower ethanol andcorn related co-products prices. This is more fully described on page 40.•VLP segment. VLP segment adjusted operating income increased by $74 million primarily due to incremental revenuesgenerated from transportation and terminaling services provided to our refining segment associated with terminals acquired in2016 and 2017, a product pipeline system acquired in 2017, and the acquisition of an undivided interest in crude system assetsin 2017. This is more fully described on page 41.•Corporate and eliminations. Corporate and eliminations, which consists primarily of general and administrative expenses andrelated depreciation and amortization expense, increased by $119 million primarily due to higher employee related costs, legaland environmental reserves, and other expenses, which are more fully described on page 38.Additional details and analysis for the changes in operating income and adjusted operating income for our reportable business segmentsand other components of net income and adjusted net income attributable to Valero stockholders, including a reconciliation of non-GAAP financial measures used in this Overview to their most comparable measures reported under U.S. GAAP, are provided belowunder “RESULTS OF OPERATIONS”.30Table of ContentsOutlookBelow are several factors that have impacted or may impact our results of operations during the first quarter of 2018:•Refining and ethanol margins are expected to remain near current levels.•Medium and heavy sour crude oil discounts are expected to remain weaker than their five-year averages as supplies of sourcrude oils in the market remain suppressed.•Sweet crude discounts are expected to remain near current levels as export demand remains strong and increased supplies fromthe Permian Basin are delivered into U.S. Gulf Coast markets.•Legislation authorizing the extension of the $1 per gallon biodiesel blender’s tax credit for biodiesel volumes blended in 2017was passed and signed into law in February 2018. As a result, we will recognize a benefit to cost of materials and other in ourrefining segment results of operations for the first quarter of 2018 of approximately $170 million. The majority of this amountwill be recognized by one of our consolidated variable interest entities (VIEs) in which we own a 50 percent interest; therefore,approximately one half of this amount (after taxes) will be excluded from net income attributable to Valero stockholders.RESULTS OF OPERATIONSThe following tables highlight our results of operations, our operating performance, and market reference prices that directly impact ouroperations. In addition, these tables include financial measures that are not defined under U.S. GAAP and represent non-GAAPfinancial measures. These non-GAAP financial measures are reconciled to their most comparable U.S. GAAP financial measures andinclude adjusted net income attributable to Valero stockholders, adjusted operating income, and refining and ethanol segment margin.In note (d) to these tables, we disclose the reasons why we believe our use of non-GAAP financial measures provides usefulinformation.Effective January 1, 2017, we revised our reportable segments to align with certain changes in how our chief operating decision makermanages and allocates resources to our business. Accordingly, we created a new reportable segment — VLP. The results of the VLPsegment, which include the results of our majority-owned master limited partnership referred to by the same name, were transferredfrom the refining segment. Our prior period segment information has been retrospectively adjusted to reflect our current segmentpresentation. The narrative following these tables provides an analysis of our results of operations.31Table of ContentsFinancial Highlights by Segment and Total Company(millions of dollars) Year Ended December 31, 2017 Refining Ethanol VLP CorporateandEliminations TotalOperating revenues: Operating revenues from external customers$90,651 $3,324 $— $5 $93,980Intersegment revenues6 176 452 (634) —Total operating revenues90,657 3,500 452 (629) 93,980Cost of sales: Cost of materials and other80,865 2,804 — (632) 83,037Operating expenses (excluding depreciation andamortization expense reflected below)3,917 443 104 (2) 4,462Depreciation and amortization expense1,800 81 53 — 1,934Total cost of sales86,582 3,328 157 (634) 89,433Other operating expenses (a)58 — 3 — 61General and administrative expenses (excludingdepreciation and amortization expense reflectedbelow)— — — 835 835Depreciation and amortization expense— — — 52 52Operating income by segment$4,017 $172 $292 $(882) 3,599Other income, net 76Interest and debt expense, net of capitalizedinterest (468)Income before income tax benefit 3,207Income tax benefit (949)Net income 4,156Less: Net income attributable to noncontrollinginterests 91Net income attributable toValero Energy Corporation stockholders $4,065________________See note references on pages 48 through 50.32Table of ContentsFinancial Highlights by Segment and Total Company (continued)(millions of dollars) Year Ended December 31, 2016 Refining Ethanol VLP CorporateandEliminations TotalOperating revenues: Operating revenues from external customers$71,968 $3,691 $— $— $75,659Intersegment revenues— 210 363 (573) —Total operating revenues71,968 3,901 363 (573) 75,659Cost of sales: Cost of materials and other63,405 3,130 — (573) 65,962Operating expenses (excluding depreciation andamortization expense reflected below)3,696 415 96 — 4,207Depreciation and amortization expense1,734 66 46 — 1,846Lower of cost or market inventory valuationadjustment (b)(697) (50) — — (747)Total cost of sales68,138 3,561 142 (573) 71,268General and administrative expenses (excludingdepreciation and amortization expense reflectedbelow)— — — 715 715Depreciation and amortization expense— — — 48 48Asset impairment loss (c)56 — — — 56Operating income by segment$3,774 $340 $221 $(763) 3,572Other income, net 56Interest and debt expense, net of capitalizedinterest (446)Income before income tax expense 3,182Income tax expense 765Net income 2,417Less: Net income attributable to noncontrollinginterests 128Net income attributable toValero Energy Corporation stockholders $2,289________________See note references on pages 48 through 50.33Table of ContentsFinancial Highlights by Segment and Total Company (continued)(millions of dollars) Year Ended December 31, 2017 2016Reconciliation of net income attributable to Valero EnergyCorporation stockholders to adjusted net income attributable toValero Energy Corporation stockholders (d) Net income attributable to Valero Energy Corporation stockholders$4,065 $2,289Exclude adjustments: Lower of cost or market inventory valuation adjustment (b)— 747Income tax expense related to the lower of cost or market inventoryvaluation adjustment— (168)Lower of cost or market inventory valuation adjustment, net of taxes— 579Asset impairment loss (c)— (56)Income tax benefit on Aruba Disposition (c)— 42Income tax benefit from Tax Reform (e)1,862 —Total adjustments1,862 565Adjusted net income attributable toValero Energy Corporation stockholders$2,203 $1,724 Year Ended December 31, 2017 Refining Ethanol VLP CorporateandEliminations TotalReconciliation of operating income to adjustedoperating income (d) Operating income by segment$4,017 $172 $292 $(882) $3,599Exclude: Other operating expenses (a)(58) — (3) — (61)Adjusted operating income$4,075 $172 $295 $(882) $3,660 Year Ended December 31, 2016 Refining Ethanol VLP CorporateandEliminations TotalReconciliation of operating income to adjustedoperating income (d) Operating income by segment$3,774 $340 $221 $(763) $3,572Exclude: Lower of cost or market inventory valuationadjustment (b)697 50 — — 747Asset impairment loss (c)(56) — — — (56)Adjusted operating income$3,133 $290 $221 $(763) $2,881________________See note references on pages 48 through 50.34Table of ContentsRefining Segment Operating Highlights(millions of dollars, except per barrel amounts) Year Ended December 31, 2017 2016 ChangeThroughput volumes (thousand BPD) Feedstocks: Heavy sour crude oil469 396 73Medium/light sour crude oil458 526 (68)Sweet crude oil1,323 1,193 130Residuals219 272 (53)Other feedstocks148 152 (4)Total feedstocks2,617 2,539 78Blendstocks and other323 316 7Total throughput volumes2,940 2,855 85 Yields (thousand BPD) Gasolines and blendstocks1,423 1,404 19Distillates1,127 1,066 61Other products (f)428 421 7Total yields2,978 2,891 87 Operating statistics Refining segment margin (d)$9,792 $8,563 $1,229Adjusted refining segment operating income(see page 34) (d)$4,075 $3,133 $942Throughput volumes (thousand BPD)2,940 2,855 85 Refining segment margin per barrel of throughput (g)$9.12 $8.20 $0.92Less: Operating expenses (excluding depreciation andamortization expense reflected below) per barrel ofthroughput3.65 3.54 0.11Depreciation and amortization expense per barrel ofthroughput1.67 1.66 0.01Adjusted refining segment operating income per barrel ofthroughput (h)$3.80 $3.00 $0.80_______________See note references on pages 48 through 50.35Table of ContentsEthanol Segment Operating Highlights(millions of dollars, except per gallon amounts) Year Ended December 31, 2017 2016 ChangeOperating statistics Ethanol segment margin (d)$696 $771 $(75)Adjusted ethanol segment operating income(see page 34) (d)$172 $290 $(118)Production volumes (thousand gallons per day)3,972 3,842 130 Ethanol segment margin per gallon of production (g)$0.48 $0.55 $(0.07)Less: Operating expenses (excluding depreciation andamortization expense reflected below) per gallon ofproduction0.31 0.30 0.01Depreciation and amortization expense per gallon ofproduction0.05 0.04 0.01Adjusted ethanol segment operating incomeper gallon of production (h)$0.12 $0.21 $(0.09)VLP Segment Operating Highlights(millions of dollars, except per barrel amounts) Year Ended December 31, 2017 2016 ChangeOperating statistics Pipeline transportation revenue$101 $78 $23Terminaling revenue348 284 64Storage and other revenue3 1 2Total VLP segment operating revenues$452 $363 $89 Pipeline transportation throughput(thousand BPD)964 829 135Pipeline transportation revenue per barrel of throughput (g)$0.29 $0.26 $0.03 Terminaling throughput (thousand BPD)2,889 2,265 624Terminaling revenue per barrel of throughput (g)$0.33 $0.34 $(0.01)_______________See note references on pages 48 through 50.36Table of ContentsAverage Market Reference Prices and Differentials(dollars per barrel, except as noted) Year Ended December 31, 2017 2016 ChangeFeedstocks Brent crude oil$54.82 $45.02 $9.80Brent less West Texas Intermediate (WTI) crude oil3.92 1.83 2.09Brent less Alaska North Slope (ANS) crude oil0.26 1.25 (0.99)Brent less Louisiana Light Sweet (LLS) crude oil0.69 0.15 0.54Brent less Argus Sour Crude Index (ASCI) crude oil4.18 5.18 (1.00)Brent less Maya crude oil7.74 8.63 (0.89)LLS crude oil54.13 44.87 9.26LLS less ASCI crude oil3.49 5.03 (1.54)LLS less Maya crude oil7.05 8.48 (1.43)WTI crude oil50.90 43.19 7.71 Natural gas (dollars per MMBtu)2.98 2.46 0.52 Products U.S. Gulf Coast: CBOB gasoline less Brent10.50 9.17 1.33Ultra-low-sulfur diesel less Brent13.26 10.21 3.05Propylene less Brent0.48 (6.68) 7.16CBOB gasoline less LLS11.19 9.32 1.87Ultra-low-sulfur diesel less LLS13.95 10.36 3.59Propylene less LLS1.17 (6.53) 7.70U.S. Mid-Continent: CBOB gasoline less WTI15.65 11.82 3.83Ultra-low-sulfur diesel less WTI18.50 13.03 5.47North Atlantic: CBOB gasoline less Brent12.57 11.99 0.58Ultra-low-sulfur diesel less Brent14.75 11.57 3.18U.S. West Coast: CARBOB 87 gasoline less ANS18.12 17.04 1.08CARB diesel less ANS17.11 14.52 2.59CARBOB 87 gasoline less WTI21.78 17.62 4.16CARB diesel less WTI20.77 15.10 5.67New York Harbor corn crush (dollars per gallon)0.26 0.30 (0.04)37Table of ContentsTotal Company, Corporate, and OtherOperating revenues increased $18.3 billion in 2017 compared to 2016 primarily due to increases in refined petroleum product pricesassociated with our refining segment. This improvement in operating revenues was mostly offset by higher cost of materials and otherand increases in other components of cost of sales between the years, resulting in an increase in operating income of $27 million in2017 compared to 2016.Excluding the adjustments to operating income in both years reflected in the tables on page 34, adjusted operating income was$3.7 billion in 2017 compared to $2.9 billion in 2016. Details regarding the $779 million increase in adjusted operating incomebetween the years are discussed by segment below.Corporate and eliminations, which consists primarily of general and administrative expenses and related depreciation and amortizationexpense, increased by $119 million in 2017 compared to 2016 primarily due to higher employee related costs of $50 million, anincrease in legal and environmental reserves of $21 million, expenses associated with the termination of an acquisition transaction of$16 million, and an increase in charitable contributions of $10 million.Income tax expense decreased $1.7 billion from 2016 to 2017 primarily due to a $1.9 billion income tax benefit in 2017 resulting fromTax Reform, which is more fully described in Note 14 of Notes to Consolidated Financial Statements. Excluding this benefit, theeffective tax rate for 2017 was 28 percent. This compares to an effective tax rate of 26 percent in 2016, which has been adjusted for theincome tax adjustments reflected in the table on page 34. The effective tax rates are lower than the U.S. statutory rate of 35 percent thatwas in effect through December 31, 2017, primarily because income from our international operations was taxed at statutory rates thatwere lower than in the U.S. The effective tax rate in 2016 was lower than the 2017 rate due to a benefit of $35 million resulting fromthe favorable resolution of an income tax audit.Refining Segment ResultsRefining segment operating revenues increased $18.7 billion and cost of materials and other increased $17.5 billion in 2017 comparedto 2016 primarily due to increases in refined petroleum product prices and crude oil feedstock costs, respectively. The resulting$1.2 billion increase in refining segment margin (as defined in note (d) on page 48) was partially offset by increases in othercomponents of cost of sales between the years, resulting in an increase in operating income of $243 million, from $3.8 billion in 2016to $4.0 billion in 2017.Excluding the adjustments reflected in the tables on page 34 from operating income in both years, adjusted operating income was$4.1 billion in 2017 compared to $3.1 billion in 2016, an increase of $942 million. The components of this increase are outlined below,along with the reasons for the changes in these components between the years.Refining segment margin increased $1.2 billion in 2017 compared to 2016, as previously noted, primarily due to the following:•Increase in distillate margins. We experienced improved distillate margins throughout all of our regions in 2017 compared to2016. For example, the Brent-based benchmark reference margin for U.S. Gulf Coast ultra-low-sulfur diesel was $13.26 perbarrel in 2017 compared to $10.21 per barrel in 2016, representing a favorable increase of $3.05 per barrel. Another example isthe WTI-based benchmark reference margin for U.S. Mid-Continent ultra-low-sulfur diesel that was $18.50 per barrel in 2017compared to $13.03 per barrel in 2016, representing a favorable increase of $5.47 per barrel. We estimate that the increase indistillate margins per barrel in 2017 compared to 2016 had a positive impact to our refining segment margin of approximately$1.2 billion.38Table of Contents•Increase in gasoline margins. We also experienced improved gasoline margins throughout all of our regions in 2017 comparedto 2016. For example, the WTI-based benchmark reference margin for U.S. Mid-Continent CBOB gasoline was $15.65 perbarrel in 2017 compared to $11.82 per barrel in 2016, representing a favorable increase of $3.83 per barrel. Another example isthe Brent-based benchmark reference margin for U.S. Gulf Coast CBOB gasoline, which was $10.50 per barrel in 2017compared to $9.17 per barrel in 2016, representing a favorable increase of $1.33 per barrel. We estimate that the increase ingasoline margins per barrel in 2017 compared to 2016 had a favorable impact to our refining segment margin of approximately$577 million.•Higher throughput volumes. Refining segment throughput volumes increased by 85,000 BPD in 2017. We estimate that theincrease in refining throughput volumes had a positive impact on our refining segment margin of approximately $283 million.•Lower discounts on sour crude oils. The market prices for refined petroleum products generally track the price of Brent crudeoil, which is a benchmark sweet crude oil, and we benefit when we process sour crude oils that are priced at a discount to Brentcrude oil. While we benefited from processing these sour crude oils in 2017, that benefit declined compared to 2016. Forexample, ASCI crude oil processed in our U.S. Gulf Coast region sold at a discount to Brent of $4.18 per barrel in 2017compared to a discount of $5.18 per barrel in 2016, representing an unfavorable decrease of $1.00 per barrel. Another exampleis Maya crude oil that sold at a discount to Brent of $7.74 per barrel in 2017 compared to $8.63 per barrel in 2016, representingan unfavorable decrease of $0.89 per barrel. We estimate that the reduction in discounts for sour crude oils that we processed in2017 had an unfavorable impact to our refining segment margin of approximately $305 million.•Lower discounts on other feedstocks. In addition to crude oil, we utilize other feedstocks such as residuals, in certain of ourrefining processes. We benefit when we process these other feedstocks that are priced at a discount to Brent crude oil. While webenefited from processing these types of feedstocks in 2017, that benefit declined compared to 2016. We estimate that thereduction in the discounts for the other feedstocks that we processed in 2017 had an unfavorable impact to our refining segmentmargin of approximately $203 million.•Higher costs of biofuel credits. As more fully described in Note 19 of Notes to Consolidated Financial Statements, we mustpurchase biofuel credits in order to meet our biofuel blending obligation under various government and regulatory complianceprograms, and the cost of these credits (primarily RINs in the U.S.) increased by $193 million from $749 million in 2016 to$942 million in 2017.•Increase in charges from VLP. Charges from the VLP segment for transportation and terminaling services increased $89 millionin 2017 compared to 2016 primarily due to additional services provided to the refining segment using terminals acquired byVLP in 2016 and 2017, a pipeline system acquired by VLP in 2017, and an undivided interest in crude system assets acquiredby VLP in 2017. The increase in charges from VLP are more fully discussed in the VLP segment analysis below.Refining segment operating expenses (excluding depreciation and amortization expense) increased $221 million primarily due to anincrease in energy costs driven by higher natural gas prices ($2.98 per MMBtu in the 2017 compared to $2.46 per MMBtu in 2016).Refining segment depreciation and amortization expense associated with our cost of sales increased $66 million due to an increase inrefinery turnaround and catalyst amortization expense primarily due to39Table of Contentscosts incurred in the latter part of 2016 in connection with significant turnaround projects at our Port Arthur and Texas City Refineries.Ethanol Segment ResultsEthanol segment operating revenues decreased $401 million and cost of materials and other decreased $326 million in 2017 comparedto 2016 primarily due to decreases in ethanol and corn related co-product prices and lower corn prices, respectively. The resulting$75 million decrease in ethanol segment margin (as defined in note (d) on page 48), along with increases in other components of costof sales between the years, resulted in a decrease in operating income of $168 million, from $340 million in 2016 to $172 million in2017.Excluding the adjustment reflected in the table on page 34 from 2016 operating income, adjusted operating income in 2016 was$290 million. Compared to this adjusted amount, operating income in 2017 decreased $118 million. The components of this decreaseare outlined below, along with changes in these components between the years.Ethanol segment margin decreased $75 million in 2017 compared to 2016, as previously noted, primarily due to the following:•Lower ethanol prices. Ethanol prices were lower in 2017 compared to 2016 primarily due to higher industry production, whichresulted in higher domestic inventories. For example, the New York Harbor ethanol price was $1.56 per gallon in 2017compared to $1.60 per gallon in 2016. We estimate that the decrease in the price of ethanol had an unfavorable impact to ourethanol segment margin of approximately $73 million.•Lower co-product prices. A decrease in export demand for corn related co-products, primarily distillers grains, had anunfavorable effect on the prices we received. We estimate that the decrease for corn related co-product prices had anunfavorable impact to our ethanol segment margin of approximately $52 million.•Lower corn prices. Despite a slight increase in the Chicago Board of Trade (CBOT) corn price from $3.58 per bushel in 2016 to$3.59 per bushel in 2017, we acquired corn at lower prices due to favorable location differentials, resulting in a decrease in theprice we paid for corn in 2017 compared to 2016. We estimate that the decrease in the price we paid for corn had a favorableimpact to our ethanol segment margin of approximately $25 million.•Higher production volumes. Ethanol segment margin was favorably impacted by increased production volumes of130,000 gallons per day in 2017 compared to 2016 primarily due to reliability improvements. We estimate that the increase inproduction volumes had a favorable impact to our ethanol segment margin of approximately $25 million.Ethanol segment operating expenses (excluding depreciation and amortization expense) increased $28 million primarily due to anincrease in energy costs driven by higher natural gas prices ($2.98 per MMBtu in 2017 compared to $2.46 per MMBtu in 2016).Ethanol segment depreciation and amortization expense associated with our cost of sales increased $15 million primarily due to thewrite-off of assets that were idled in 2017.40Table of ContentsVLP Segment ResultsVLP segment operating revenues increased $89 million in 2017 compared to 2016 primarily due to incremental revenues generatedfrom transportation and terminaling services provided to our refining segment associated with terminals and pipelines acquired in 2016and 2017. This increase in VLP segment revenues was partially offset by increases in components of cost of sales between the years,resulting in an increase in operating income of $71 million, from $221 million in 2016 to $292 million in 2017.Excluding the adjustment reflected in the table on page 34 from 2017 operating income, adjusted operating income in 2017 was$295 million, an increase of $74 million compared to 2016. The components of this increase are outlined below, along with the reasonsfor the changes in these components between the years.VLP segment revenues increased $89 million in 2017 compared to 2016, as previously noted, primarily due to the following:•Incremental throughput from acquired businesses and assets. VLP generated incremental terminaling revenues of $56 millionfrom services provided to the refining segment by the McKee, Meraux, Three Rivers, and Port Arthur terminals. The McKee,Meraux, and Three Rivers Terminals were acquired in 2016 and the Port Arthur terminal was acquired in 2017. VLP alsogenerated incremental pipeline revenues of $15 million from the Parkway pipeline and Red River crude system, which wereacquired in 2017. The incremental revenues generated by these businesses and assets had a favorable impact to VLP’s operatingrevenues of $71 million.•Higher throughput volumes at systems owned or acquired prior to 2016. The refining segment shipped higher volumes of crudeoil and refined petroleum products using VLP’s terminals and pipeline systems owned or acquired prior to 2016, which resultedin incremental revenues of $16 million in 2017.VLP segment operating expenses (excluding depreciation and amortization expense) and depreciation and amortization expenseassociated with our cost of sales increased $8 million and $7 million, respectively, primarily due to expenses associated with the PortArthur terminal, the Parkway pipeline, and the Red River crude system, which were acquired in 2017.41Table of ContentsFinancial Highlights by Segment and Total Company(millions of dollars) Year Ended December 31, 2016 Refining Ethanol VLP CorporateandEliminations TotalOperating revenues: Operating revenues from external customers$71,968 $3,691 $— $— $75,659Intersegment revenues— 210 363 (573) —Total operating revenues71,968 3,901 363 (573) 75,659Cost of sales: Cost of materials and other63,405 3,130 — (573) 65,962Operating expenses (excluding depreciation andamortization expense reflected below)3,696 415 96 — 4,207Depreciation and amortization expense1,734 66 46 — 1,846Lower of cost or market inventory valuationadjustment (b)(697) (50) — — (747)Total cost of sales68,138 3,561 142 (573) 71,268General and administrative expenses (excludingdepreciation and amortization expense reflectedbelow)— — — 715 715Depreciation and amortization expense— — — 48 48Asset impairment loss (c)56 — — — 56Operating income by segment$3,774 $340 $221 $(763) 3,572Other income, net 56Interest and debt expense, net of capitalizedinterest (446)Income before income tax expense 3,182Income tax expense 765Net income 2,417Less: Net income attributable to noncontrollinginterests 128Net income attributable toValero Energy Corporation stockholders $2,289________________See note references on pages 48 through 50.42Table of ContentsFinancial Highlights by Segment and Total Company (continued)(millions of dollars) Year Ended December 31, 2015 Refining Ethanol VLP CorporateandEliminations TotalOperating revenues: Operating revenues from external customers$84,521 $3,283 $— $— $87,804Intersegment revenues— 151 244 (395) —Total operating revenues84,521 3,434 244 (395) 87,804Cost of sales: Cost of materials and other71,512 2,744 — (395) 73,861Operating expenses (excluding depreciation andamortization expense reflected below)3,689 448 106 — 4,243Depreciation and amortization expense1,699 50 46 — 1,795Lower of cost or market inventory valuationadjustment (b)740 50 — — 790Total cost of sales77,640 3,292 152 (395) 80,689General and administrative expenses (excludingdepreciation and amortization expense reflectedbelow)— — — 710 710Depreciation and amortization expense— — — 47 47Operating income by segment$6,881$142$92$(757)6,358Other income, net 46Interest and debt expense, net of capitalizedinterest (433)Income before income tax expense 5,971Income tax expense 1,870Net income 4,101Less: Net income attributable to noncontrollinginterests 111Net income attributable toValero Energy Corporation stockholders $3,990________________See note references on pages 48 through 50.43Table of ContentsFinancial Highlights by Segment and Total Company (continued)(millions of dollars) Year Ended December 31, 2016 2015Reconciliation of net income attributable to Valero EnergyCorporation stockholders to adjusted net income attributable toValero Energy Corporation stockholders (d) Net income attributable to Valero Energy Corporation stockholders$2,289 $3,990Exclude adjustments: Lower of cost or market inventory valuation adjustment (b)747 (790)Income tax expense related to the lower of cost or market inventoryvaluation adjustment(168) 166Lower of cost or market inventory valuation adjustment, net of taxes579 (624)Asset impairment loss (c)(56) —Income tax benefit on Aruba Disposition (c)42 —Total adjustments565 (624)Adjusted net income attributable toValero Energy Corporation stockholders$1,724 $4,614 Year Ended December 31, 2016 Refining Ethanol VLP CorporateandEliminations TotalReconciliation of operating income to adjustedoperating income (d) Operating income by segment$3,774 $340 $221 $(763) $3,572Exclude: Lower of cost or market inventory valuationadjustment (b)697 50 — — 747Asset impairment loss (c)(56) — — — (56)Adjusted operating income$3,133 $290 $221 $(763) $2,881 Year Ended December 31, 2015 Refining Ethanol VLP CorporateandEliminations TotalReconciliation of operating income to adjustedoperating income (d) Operating income by segment$6,881 $142 $92 $(757) $6,358Exclude: Lower of cost or market inventory valuationadjustment (b)(740) (50) — — (790)Adjusted operating income$7,621 $192 $92 $(757) $7,148_______________See note references on pages 48 through 50.44Table of ContentsRefining Segment Operating Highlights(millions of dollars, except per barrel amounts) Year Ended December 31, 2016 2015 ChangeThroughput volumes (thousand BPD) Feedstocks: Heavy sour crude oil396 438 (42)Medium/light sour crude oil526 428 98Sweet crude oil1,193 1,208 (15)Residuals272 274 (2)Other feedstocks152 140 12Total feedstocks2,539 2,488 51Blendstocks and other316 311 5Total throughput volumes2,855 2,799 56 Yields (thousand BPD) Gasolines and blendstocks1,404 1,364 40Distillates1,066 1,066 —Other products (f)421 408 13Total yields2,891 2,838 53 Operating statistics Refining segment margin (d)$8,563 $13,009 $(4,446)Adjusted refining segment operating income(see page 44) (d)$3,133 $7,621 $(4,488)Throughput volumes (thousand BPD)2,855 2,799 56 Refining segment margin per barrel of throughput (g)$8.20 $12.73 $(4.53)Less: Operating expenses (excluding depreciation andamortization expense reflected below) per barrel ofthroughput3.54 3.61 (0.07)Depreciation and amortization expense per barrel ofthroughput1.66 1.66 —Adjusted refining segment operating income per barrel ofthroughput (h)$3.00 $7.46 $(4.46)_______________See note references on pages 48 through 50.45Table of ContentsEthanol Segment Operating Highlights(millions of dollars, except per gallon amounts) Year Ended December 31, 2016 2015 ChangeOperating statistics Ethanol segment margin (d)$771 $690 $81Adjusted ethanol segment operating income(see page 44) (d)$290 $192 $98Production volumes (thousand gallons per day)3,842 3,827 15 Ethanol segment margin per gallon of production (g)$0.55 $0.49 $0.06Less: Operating expenses (excluding depreciation andamortization expense reflected below) per gallon ofproduction0.30 0.32 (0.02)Depreciation and amortization expense per gallon ofproduction0.04 0.03 0.01Adjusted ethanol segment operating incomeper gallon of production (h)$0.21 $0.14 $0.07VLP Segment Operating Highlights(millions of dollars, except per barrel amounts) Year Ended December 31, 2016 2015 ChangeOperating statistics Pipeline transportation revenue$78 $81 $(3)Terminaling revenue284 162 122Storage and other revenue1 1 —Total VLP segment operating revenues$363 $244 $119 Pipeline transportation throughput(thousand barrels per day)829 950 (121)Pipeline transportation revenue per barrel of throughput (g)$0.26 $0.23 $0.03 Terminaling throughput (thousand barrels per day)2,265 1,340 925Terminaling revenue per barrel of throughput (g)$0.34 $0.33 $0.01_______________See note references on pages 48 through 50.46Table of ContentsAverage Market Reference Prices and Differentials(dollars per barrel, except as noted) Year Ended December 31, 2016 2015 ChangeFeedstocks Brent crude oil$45.02 $53.62 $(8.60)Brent less West Texas Intermediate (WTI) crude oil1.83 4.91 (3.08)Brent less Alaska North Slope (ANS) crude oil1.25 0.67 0.58Brent less Louisiana Light Sweet (LLS) crude oil0.15 1.26 (1.11)Brent less Argus Sour Crude Index (ASCI) crude oil5.18 5.63 (0.45)Brent less Maya crude oil8.63 9.54 (0.91)LLS crude oil44.87 52.36 (7.49)LLS less ASCI crude oil5.03 4.37 0.66LLS less Maya crude oil8.48 8.28 0.20WTI crude oil43.19 48.71 (5.52) Natural gas (dollars per MMBtu)2.46 2.58 (0.12) Products U.S. Gulf Coast: CBOB gasoline less Brent9.17 9.83 (0.66)Ultra-low-sulfur diesel less Brent10.21 12.64 (2.43)Propylene less Brent(6.68) (5.94) (0.74)CBOB gasoline less LLS9.32 11.09 (1.77)Ultra-low-sulfur diesel less LLS10.36 13.90 (3.54)Propylene less LLS(6.53) (4.68) (1.85)U.S. Mid-Continent: CBOB gasoline less WTI11.82 17.59 (5.77)Ultra-low-sulfur diesel less WTI13.03 19.02 (5.99)North Atlantic: CBOB gasoline less Brent11.99 12.85 (0.86)Ultra-low-sulfur diesel less Brent11.57 16.05 (4.48)U.S. West Coast: CARBOB 87 gasoline less ANS17.04 25.56 (8.52)CARB diesel less ANS14.52 16.90 (2.38)CARBOB 87 gasoline less WTI17.62 29.80 (12.18)CARB diesel less WTI15.10 21.14 (6.04)New York Harbor corn crush (dollars per gallon)0.30 0.22 0.0847Table of ContentsThe following notes relate to references on pages 32 through 36 and pages 42 through 46.(a)Other operating expenses reflects expenses that are not associated with our cost of sales. Other operating expenses for the year ended December 31, 2017primarily includes costs incurred at certain of our U.S. Gulf Coast refineries and certain VLP assets due to damage associated with Hurricane Harvey.(b)In accordance with U.S. GAAP, we are required to state our inventories at the lower of cost or market. When the market price of our inventory falls belowcost, we record a lower of cost or market inventory valuation adjustment to write down the value to market. In subsequent periods, the value of ourinventory is reassessed and a lower of cost or market inventory valuation adjustment is recorded to reflect the net change in the lower of cost or marketinventory valuation reserve between periods. As of December 31, 2017, the market price of our inventory was above cost; therefore, we did not have alower of cost or market inventory valuation reserve as of that date. During the year ended December 31, 2016, we recorded a change in our inventoryvaluation reserve that was established on December 31, 2015, resulting in a noncash benefit of $747 million, of which $697 million and $50 millionwere attributable to our refining segment and ethanol segment, respectively. The year ended December 31, 2015 includes a lower of cost or marketinventory valuation adjustment that resulted in a noncash charge of $790 million, of which $740 million and $50 million were attributable to ourrefining segment and ethanol segment, respectively. The noncash benefit for the year ended December 31, 2016 differs from the noncash charge for theyear ended December 31, 2015 due to the foreign currency effect of inventories held by our international operations.(c)Effective October 1, 2016, we (i) transferred ownership of all of our assets in Aruba, other than certain hydrocarbon inventories and working capital, toRefineria di Aruba N.V. (RDA), an entity wholly-owned by the Government of Aruba (GOA), (ii) settled our obligations under various agreements withthe GOA, including agreements that required us to dismantle our leasehold improvements under certain conditions, and (iii) sold the working capital ofour Aruba operations, including hydrocarbon inventories, to the GOA, CITGO Aruba Refining N.V. (CAR), and CITGO Petroleum Corporation (togetherwith CAR and certain other affiliates, collectively, CITGO). We refer to this transaction as the “Aruba Disposition.”In June 2016, we recognized an asset impairment loss of $56 million representing all of the remaining carrying value of the long-lived assets of our crudeoil and refined petroleum products terminal and transshipment facility in Aruba (collectively, the Aruba Terminal). We recognized the impairment loss atthat time because we concluded that it was more likely than not that we would ultimately transfer ownership of these assets to the GOA as a result ofagreements entered into in June 2016 between the GOA and CITGO for the GOA’s lease of those assets to CITGO.In September 2016 and in connection with the Aruba Disposition, our U.S. subsidiaries cancelled all outstanding debt obligations owed to them by ourAruba subsidiaries, which resulted in the recognition by us of an income tax benefit of $42 million during the year ended December 31, 2016.(d)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 totheir most comparable U.S. GAAP measures, they provide improved comparability between periods through the exclusion of certain items that webelieve are not indicative of our core operating performance and that may obscure our underlying business results and trends. These non-GAAP measuresshould 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 ananalysis of our results of operations as reported under U.S. GAAP. In addition, these non-GAAP measures may not be comparable to similarly titledmeasures used by other companies because we may define them differently, which diminishes the utility of these measures.48Table of ContentsNon-GAAP measures are as follows:◦Adjusted net income attributable to Valero Energy Corporation stockholders is defined as net income attributable to Valero EnergyCorporation stockholders excluding the lower of cost or market inventory valuation adjustment, its related income tax effect, the assetimpairment loss, the income tax benefit on the Aruba Disposition, and the Tax Reform income tax benefit.◦Refining and ethanol segment margins are defined as segment operating income excluding the lower of cost or market inventory valuationadjustment, operating expenses (excluding depreciation and amortization expense), other operating expenses, depreciation and amortizationexpense associated with our cost of sales, and the asset impairment loss as shown below: Year Ended December 31, 2017 2016 2015Reconciliation of refining segment operating incometo refining segment margin Operating income$4,017 $3,774 $6,881Add back: Operating expenses (excluding depreciation andamortization expense)3,917 3,696 3,689Depreciation and amortization expense1,800 1,734 1,699Other operating expenses (a)58 — —Lower of cost or market inventory valuationadjustment (b)— (697) 740Asset impairment loss (c)— 56 —Refining segment margin$9,792 $8,563 $13,009 Year Ended December 31, 2017 2016 2015Reconciliation of ethanol segment operating incometo ethanol segment margin Operating income$172 $340 $142Add back: Operating expenses (excluding depreciation andamortization expense)443 415 448Depreciation and amortization expense81 66 50Lower of cost or market inventory valuationadjustment (b)— (50) 50Ethanol segment margin$696 $771 $690◦Adjusted refining segment operating income is defined as refining segment operating income excluding other operating expenses, the lower ofcost or market inventory valuation adjustment, and the asset impairment loss.◦Adjusted ethanol segment operating income is defined as ethanol segment operating income excluding the lower of cost or market inventoryvaluation adjustment.◦Adjusted VLP segment operating income is defined as VLP segment operating income excluding other operating expenses.(e)On December 22, 2017, Tax Reform was enacted, resulting in the remeasurement of our U.S. deferred taxes and the recognition of a liability for taxes onthe deemed repatriation of our foreign earnings and profits. Under49Table of ContentsU.S. GAAP, we are required to recognize the effect of Tax Reform in the period of enactment. As a result, we recognized a $1.9 billion income tax benefitin December 2017, which represents the estimated impact of Tax Reform. This estimate may be refined in future periods as further information becomesavailable.(f)Other products primarily include petrochemicals, gas oils, No. 6 fuel oil, petroleum coke, sulfur, and asphalt.(g)All per barrel of throughput and per gallon of production amounts are calculated by dividing the associated dollar amount by the throughput volumes,production volumes, pipeline transportation throughput volumes, or terminaling throughput volumes for the period, as applicable.Throughput volumes, production volumes, pipeline transportation throughput volumes, and terminaling throughput volumes are calculated bymultiplying throughput volumes per day, production volumes per day, pipeline transportation throughput volumes per day, and terminaling throughputvolumes per day by the number of days in the applicable period.(h)Adjusted operating income per barrel represents adjusted operating income (defined in (d) above) for our refining segment divided by the respectivethroughput volumes. Ethanol segment margin per gallon of production represents ethanol segment margin (as defined in (d) above) for our ethanolsegment divided by production volumes. Pipeline transportation revenue per barrel and terminaling revenue per barrel represent pipeline transportationrevenue and terminaling revenue for our VLP segment divided by pipeline transportation throughput and terminaling throughput volumes, respectively.Throughput and production volumes are calculated by multiplying throughput and production volumes per day (as provided in the accompanyingtables) by the number of days in the applicable period.50Table of ContentsTotal Company, Corporate, and OtherOperating revenues decreased $12.1 billion in 2016 compared to 2015 primarily due to decreases in refined petroleum products pricesassociated with our refining segment. This decline in operating revenues was partially offset by lower cost of materials and other andthe positive effect from the lower of cost or market inventory valuation adjustments in both years, resulting in a decrease in operatingincome of $2.8 billion, from $6.4 billion in 2015 to $3.6 billion in 2016.Excluding the adjustments to operating income in both years reflected in the tables on page 44, adjusted operating income was$2.9 billion in 2016 compared to $7.1 billion in 2015. Details regarding the $4.3 billion decrease in adjusted operating income betweenthe years are discussed by segment below.Income tax expense decreased $1.1 billion from 2015 to 2016 primarily due to lower income before income tax expense. Excluding theincome tax adjustments reflected in the table on page 44 from both years, the effective tax rate for 2016 was 26 percent compared to30 percent in 2015. The effective tax rates are lower than the U.S. statutory rate of 35 percent primarily because income from ourinternational operations was taxed at statutory rates that were lower than in the U.S. The effective tax rate in 2016 was lower than the2015 rate due to a benefit of $35 million resulting from the favorable resolution of an income tax audit.Refining Segment ResultsRefining segment operating revenues decreased $12.6 billion and cost of materials and other decreased $8.1 billion in 2016 comparedto 2015 primarily due to decreases in refined petroleum product prices and crude oil feedstock costs, respectively. The resulting$4.4 billion decrease in refining segment margin was partially offset by the positive effect from the lower of cost or market inventoryvaluation adjustments in both years, resulting in a decrease in operating income of $3.1 billion, from $6.9 billion in 2015 to $3.8 billionin 2016.Excluding the adjustments reflected in the tables on page 44 from operating income in both years, adjusted operating income was$3.1 billion in 2016 compared to $7.6 billion in 2015, a decrease of $4.5 billion. The components of this decrease are outlined below,along with the reasons for the changes in these components between the years.Refining segment margin decreased $4.4 billion in 2016 compared to 2015, as previously noted, primarily due to the following:•Decrease in gasoline margins. We experienced a decrease in gasoline margins throughout all our regions in 2016 compared to2015. For example, the WTI-based benchmark reference margin for U.S. Mid-Continent CBOB gasoline was $11.82 per barrelin 2016 compared to $17.59 per barrel in 2015, representing an unfavorable decrease of $5.77 per barrel. Another example isthe ANS-based reference margin for U.S. West Coast CARBOB 87 gasoline, which was $17.04 per barrel in 2016 compared to$25.56 per barrel in 2015, representing an unfavorable decrease of $8.52 per barrel. We estimate that the decrease in gasolinemargins per barrel in 2016 compared to 2015 had an unfavorable impact to our refining segment margin of approximately$1.7 billion.•Decrease in distillate margins. We also experienced a decrease in distillate margins throughout all our regions in 2016compared to 2015. For example, the Brent-based benchmark reference margin for U.S. Gulf Coast ultra-low-sulfur dieselwas $10.21 per barrel in 2016 compared to $12.64 per barrel in 2015, representing an unfavorable decrease of $2.43 perbarrel. Another example is the WTI-based benchmark reference margin for U.S. Mid-Continent ultra-low-sulfur diesel thatwas $13.03 per barrel in 2016 compared to $19.02 per barrel in 2015, representing an unfavorable51Table of Contentsdecrease of $5.99 per barrel. We estimate that the decrease in distillate margins per barrel in 2016 compared to 2015 had anunfavorable impact to our refining segment margin of approximately $1.6 billion.•Lower discounts on light sweet and sour crude oils. The market prices for refined petroleum products generally track the priceof Brent crude oil, which is a benchmark sweet crude oil, and we benefit when we process crude oils that are priced at adiscount to Brent crude oil. During 2016, we benefited from processing WTI crude oil (a type of sweet crude oil), however, thatbenefit declined compared to 2015. For example, WTI crude oil processed in our U.S. Mid-Continent region sold at a discountof $1.83 per barrel to Brent crude oil in 2016 compared to a discount of $4.91 per barrel in 2015, representing an unfavorabledecrease of $3.08 per barrel. Another example is Maya crude oil (a type of sour crude oil) that sold at a discount of $8.63 perbarrel to Brent crude oil in 2016 compared to a discount of $9.54 per barrel in 2015, representing an unfavorable decrease of$0.91 per barrel. We estimate that the reduction in the discounts for light sweet crude oils and sour crude oils that we processedin 2016 had an unfavorable impact to our refining segment margin of approximately $900 million.•Higher costs of biofuel credits. As more fully described in Note 19 of Notes to Consolidated Financial Statements, we mustpurchase biofuel credits in order to meet our biofuel blending obligation under various government and regulatory complianceprograms, and the cost of these credits (primarily RINs in the U.S.) increased by $309 million from $440 million in 2015 to$749 million in 2016.•Increase in charges from VLP. Charges from the VLP segment for transportation and terminaling services increased$119 million in 2016 compared to 2015 primarily due to additional services provided to the refining segment using terminalsacquired by VLP in 2015 and 2016. The increase in charges from VLP are more fully discussed in the VLP segment analysisbelow.•Higher throughput volumes. Refining throughput volumes increased by 56,000 BPD in 2016. We estimate that the increase inrefining throughput volumes had a positive impact on our refining segment margin of approximately $175 million.Refining segment depreciation and amortization expense associated with our cost of sales increased $35 million primarily due to anincrease in refinery turnaround and catalyst amortization expense resulting from the completion of turnaround projects at several of ourrefineries in 2016.Ethanol Segment ResultsEthanol segment operating revenues increased $467 million and cost of materials and other increased $386 million in 2016 comparedto 2015 primarily due to an increase in ethanol production and sales volumes. The resulting $81 million increase in ethanol segmentmargin, along with the positive effect from the lower of cost or market inventory valuation adjustments in both years, resulted in anincrease in operating income of $198 million, from $142 million in 2015 to $340 million in 2016.Excluding the adjustments reflected in the tables on page 44 from both years, adjusted operating income was $290 million in 2016compared to $192 million in 2015, an increase of $98 million. The components of this increase are outlined below, along with thereasons for the changes in these components between the years.52Table of ContentsEthanol segment margin increased $81 million in 2016 compared to 2015, as previously noted, primarily due to the following:•Lower corn prices. Corn prices were lower in 2016 compared to 2015 primarily due to higher yields from the corn crop in thecorn-producing regions of the U.S. Mid-Continent in 2016. For example, the CBOT corn price was $3.58 per bushel in 2016compared to $3.77 per bushel in 2015. We estimate that the decrease in the price of corn that we processed during 2016 had afavorable impact to our ethanol segment margin of approximately $105 million.•Higher ethanol prices. Ethanol prices were slightly higher in 2016 compared to 2015 primarily due to increased ethanoldemand. Despite higher domestic production during 2016, inventory levels declined during the year primarily due to higherexports. For example, the New York Harbor ethanol price was $1.60 per gallon in 2016 compared to $1.59 per gallon in 2015.We estimate that the increase in the price of ethanol per gallon in 2016 had a favorable impact to our ethanol segment margin ofapproximately $24 million.•Higher production volumes. Ethanol segment margin was favorably impacted by increased production volumes of15,000 gallons per day in 2016 compared to 2015 primarily due to improved operating efficiencies and mechanical reliability.We estimate that the increase in production volumes had a favorable impact to our ethanol segment margin of approximately$22 million.•Lower co-product prices. A decrease in export demand for corn related co-products, primarily distillers grains, had anunfavorable effect on the prices we received. We estimate that the decrease in corn related co-product prices had an unfavorableimpact to our ethanol segment margin of approximately $70 million.Ethanol segment operating expenses (excluding depreciation and amortization expense) decreased $33 million primarily due to a$14 million decrease in energy costs related to lower natural gas prices ($2.46 per MMBtu in 2016 compared to $2.58 per MMBtu in2015) and a $15 million decrease in chemical costs.Ethanol segment depreciation and amortization expense associated with our cost of sales increased $16 million primarily due to a$10 million gain on the sale of certain plant assets in 2015 that was reflected in depreciation and amortization expense thereby reducingdepreciation and amortization expense in 2015.VLP Segment ResultsVLP segment operating revenues increased $119 million in 2016 compared to 2015 primarily due to incremental revenues generatedfrom transportation and terminaling services provided to our refining segment associated with terminals acquired in 2015 and 2016.This increase in VLP segment revenues, along with a decrease in operating expenses (excluding depreciation and amortization expense)between the years, resulted in an increase in operating income of $129 million, from $92 million in 2015 to $221 million in 2016. Thecomponents of this increase are outlined below, along with the reasons for the changes in these components between the years.VLP revenues increased $119 million in 2016 compared to 2015, as previously noted, primarily due to the following:•Incremental throughput from acquired businesses. VLP generated incremental terminaling revenues of $124 million fromservices provided to the refining segment by the McKee , Meraux, and Three53Table of ContentsRivers terminals, which were acquired by VLP in 2016, and the St. Charles, Houston, and Corpus Christi terminals which wereacquired by VLP in 2015.•Lower throughput at systems owned or acquired prior to 2015. VLP experienced a decrease in throughput volumes, primarily atthe Port Arthur logistics system as a result of planned turnaround activity at the Port Arthur Refinery and at the McKee crudesystem as a result of decreased crude oil production in the Texas panhandle. The decrease in throughput volumes at thesesystems had an unfavorable impact to VLP’s operating revenues of $5 million.VLP segment operating expenses (excluding depreciation and amortization expense) decreased $10 million primarily due to lowermaintenance expense at the Corpus Christi terminal related to inspection activity in 2015.LIQUIDITY AND CAPITAL RESOURCESCash Flows for the Year Ended December 31, 2017Our operations generated $5.5 billion of cash in 2017. Net income of $4.2 billion, net of the $1.9 billion noncash benefit from TaxReform and other noncash charges of $2.1 billion, and a positive change in working capital of $1.3 billion were the primary drivers ofthe cash generated by our operations in 2017. Other noncash charges included $2.0 billion of depreciation and amortization expense.(See “RESULTS OF OPERATIONS” for further discussion of our operations.) The Tax Reform benefit and the change in our workingcapital are further detailed in Notes 14 and 17, respectively, of Notes to Consolidated Financial Statements. The source of cash resultingfrom the $1.3 billion change in working capital was mainly due to:•an increase in accounts payable, partially offset by an increase in receivables, primarily as a result of an increase in commodityprices;•an increase in income taxes payable resulting from deferring the payment of our fourth quarter 2017 estimated taxes to January2018, as allowed by tax relief authorization from the IRS; and•an increase in inventory due to higher volumes held combined with an increase in commodity prices.The $5.5 billion of cash generated by our operations, along with borrowings of $380 million under a $750 million senior unsecuredrevolving credit facility (the VLP Revolver) as discussed in Note 8 of Notes to Consolidated Financial Statements, were used mainly to:•fund $2.3 billion in capital investments,which include capital expenditures, deferred turnaround and catalyst costs, andinvestments in joint ventures;•acquire an undivided interest in crude system assets for $72 million;•purchase common stock for treasury of $1.4 billion;•pay common stock dividends of $1.2 billion;•pay distributions to noncontrolling interests of $67 million; and•increase available cash on hand by $1.0 billion.Cash Flows for the Year Ended December 31, 2016Our operations generated $4.8 billion of cash in 2016, driven primarily by net income of $2.4 billion, net noncash charges to income of$1.4 billion, and positive change in working capital of $976 million. Noncash charges included $1.9 billion of depreciation andamortization expense, $56 million for the asset impairment loss associated with our Aruba Terminal, and $230 million of deferredincome tax expense, partially offset by a benefit of $747 million from a lower of cost or market inventory valuation adjustment. (See“RESULTS OF OPERATIONS” for further discussion of our operations.) The change in our working capital is further54Table of Contentsdetailed in Note 17 of Notes to Consolidated Financial Statements. The source of cash resulting from the $976 million change inworking capital was mainly due to:•an increase in accounts payable, offset by an increase in receivables, primarily as a result of higher commodity prices;•a reduction of our inventories; and•a reduction in prepaid expenses and other related to income taxes receivable due to utilization in 2016 of our 2015 overpaymentof taxes.The $4.8 billion of cash generated by our operations, along with $2.2 billion in proceeds from the issuance of debt (including$1.25 billion of 3.4 percent Senior Notes due September 15, 2026, $500 million of 4.375 percent Senior Notes due December 15, 2026issued by VLP, and borrowings under the VLP Revolver of $349 million as discussed in Note 8 of Notes to Consolidated FinancialStatements), were used mainly to:•fund $2.0 billion in capital investments, which include capital expenditures, deferred turnaround and catalyst costs, andinvestments in joint ventures;•redeem our 6.125 percent Senior Notes for $778 million (or 103.70 percent of stated value) and our 7.2 percent Senior Notesfor $213 million (or 106.27 percent of stated value);•make payments on debt and capital lease obligations of $525 million, of which $494 million related to borrowings under theVLP Revolver, $9 million related to capital lease obligations, and $22 million related to other non-bank debt;•pay off a long-term liability of $137 million owed to a joint venture partner for an owner-method joint venture investment;•purchase common stock for treasury of $1.3 billion;•pay common stock dividends of $1.1 billion;•pay distributions to noncontrolling interests of $65 million; and•increase available cash on hand by $702 million.Cash Flows for the Year Ended December 31, 2015Our operations generated $5.6 billion of cash in 2015, driven primarily by net income of $4.1 billion and noncash charges to income of$2.8 billion. Noncash charges included $1.8 billion of depreciation and amortization expense, $790 million from a lower of cost ormarket inventory valuation adjustment, and $165 million of deferred income tax expense. (See “RESULTS OF OPERATIONS” forfurther discussion of our operations.) However, the change in our working capital during the year had a negative impact to cashgenerated by our operations of $1.3 billion as shown in Note 17 of Notes to Consolidated Financial Statements. This use of cash mainlyresulted from:•a decrease in accounts payable, net of a decrease in receivables, primarily as a result of a decrease in commodity prices fromDecember 2014 to December 2015;•an increase in prepaid expenses and other related to income taxes receivable and a decrease in income taxes payable due to taxpayments associated with the settlement of several IRS audits and an overpayment of taxes in 2015. This overpayment resultedfrom a change in the U.S. Federal tax laws late in the year that reinstated the bonus depreciation deduction, which lowered ourcurrent income tax expense; and•an increase in inventories, mainly due to the build in inventory volumes from 2015 as we purchased crude oil at prices wedeemed favorable during the fourth quarter of 2015.55Table of ContentsThe $5.6 billion of cash generated by our operations, along with (i) $1.45 billion in proceeds from the issuance of debt and (ii) netproceeds of $189 million from VLP’s public offering of 4,250,000 common units as discussed in Note 10 of Notes to ConsolidatedFinancial Statements, were used mainly to:•fund $2.4 billion in capital investments, which include capital expenditures, deferred turnaround and catalyst costs, andinvestments in joint ventures;•make payments on debt and capital lease obligations of $513 million, of which $400 million related to our 4.5 percent SeniorNotes, $75 million related to our 8.75 percent debentures, $25 million related to the VLP Revolver, $10 million related to capitallease obligations, and $3 million related to other non-bank debt;•purchase common stock for treasury of $2.8 billion;•pay common stock dividends of $848 million; and•increase available cash on hand by $425 million.Capital InvestmentsWe define capital investments as capital expenditures for purchases of, additions to, and improvements in our property, plant, andequipment, and turnaround and catalyst costs; and investments in joint ventures.Our operations, especially those of our refining segment, are highly capital intensive. Each of our refineries comprises a large base ofproperty assets, consisting of a series of interconnected, highly integrated and interdependent crude oil processing facilities andsupporting logistical infrastructure (Units), and these Units are improved continuously. The cost of improvements, which consist of theaddition of new Units and betterments of existing Units, can be significant. We have historically acquired our refineries at amountssignificantly below their replacement costs, whereas our improvements are made at full replacement value. As such, the costs forimproving our refinery assets increase over time and are significant in relation to the amounts we paid to acquire our refineries. We planfor these improvements by developing a multi-year capital program that is updated and revised based on changing internal and externalfactors.We make improvements to our refineries in order to maintain and enhance their operating reliability, to meet environmental obligationswith respect to reducing emissions and removing prohibited elements from the products we produce, or to enhance their profitability.Reliability and environmental improvements generally do not increase the throughput capacities of our refineries. Improvements thatenhance refinery profitability may increase throughput capacity, but many of these improvements allow our refineries to processdifferent types of crude oil and to refine crude oil into products with higher market values. Therefore, many of our improvements donot increase throughput capacity significantly.For 2018, we expect to incur approximately $2.7 billion for capital investments, but we continuously evaluate our capital budget andmake changes as conditions warrant. This capital investment estimate excludes potential strategic acquisitions, including acquisitions ofundivided interests.We consolidate the financial statements of VIEs if we are the primary beneficiary of their operations, even though we may have noownership interest in them. Because we consolidate the financial statements of these entities, our financial statements reflect the capitalexpenditures they make. Our statements of cash flows separately reflect the capital expenditures made by these entities (along with anequal offset of these amounts included in contributions from noncontrolling interests within financing activities) and these expendituresare not included in our $2.7 billion estimate of 2018 capital investments. See Note 11 of Notes to Consolidated Financial Statements fora description of our VIEs.56Table of ContentsContractual ObligationsOur contractual obligations as of December 31, 2017 are summarized below (in millions). Payments Due by Year 2018 2019 2020 2021 2022 Thereafter TotalDebt and capitallease obligations (a)$161 $811 $1,319 $58 $60 $7,212 $9,621Operating lease obligations359 236 148 104 74 366 1,287Purchase obligations18,582 2,375 1,697 1,271 1,209 5,091 30,225Other long-term liabilities— 198 219 159 188 1,965 2,729Total$19,102 $3,620 $3,383 $1,592 $1,531 $14,634 $43,862______________________________(a)Debt obligations exclude amounts related to unamortized discounts and debt issuance costs. Capital lease obligations include related interest expense.Our debt and capital lease obligations are further described in Note 8 of Notes to Consolidated Financial Statements.Debt and Capital Lease ObligationsOur debt and capital lease obligations are described in Note 8 of 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 someof our bank credit facilities and other arrangements would increase. All of our ratings on our senior unsecured debt are at or aboveinvestment grade level as follows: RatingRating Agency Valero VLPMoody’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 ratingswill not be lowered or withdrawn entirely by a rating agency. We note that these credit ratings are not recommendations to buy, sell, orhold our securities. Each rating should be evaluated independently of any other rating. Any future reduction below investment grade orwithdrawal of one or more of our credit ratings could have a material adverse impact on our ability to obtain short- and long-termfinancing and the cost of such financings.Operating Lease ObligationsOur operating lease obligations include leases for land, office facilities and equipment, transportation equipment, time charters forocean-going tankers and coastal vessels, dock facilities, and various facilities and equipment used in the storage, transportation,production, and sale of refinery feedstocks, refined petroleum products, and corn inventories. Operating lease obligations include alloperating leases that have initial or remaining noncancelable terms in excess of one year, and are not reduced by minimum rentals to bereceived by us under subleases.Purchase ObligationsA purchase obligation is an enforceable and legally binding agreement to purchase goods or services that specifies significant terms,including (i) fixed or minimum quantities to be purchased, (ii) fixed, minimum,57Table of Contentsor variable price provisions, and (iii) the approximate timing of the transaction. We have various purchase obligations includingindustrial gas and chemical supply arrangements (such as hydrogen supply arrangements), crude oil and other feedstock supplyarrangements, and various throughput and terminaling agreements. We enter into these contracts to ensure an adequate supply ofutilities and feedstock and adequate storage capacity to operate our refineries. Substantially all of our purchase obligations are based onmarket prices or adjustments based on market indices. Certain of these purchase obligations include fixed or minimum volumerequirements, while others are based on our usage requirements. The purchase obligation amounts shown in the preceding table includeboth short- and long-term obligations and are based on (a) fixed or minimum quantities to be purchased and (b) fixed or estimatedprices to be paid based on current market conditions.Other Long-term LiabilitiesOur other long-term liabilities are described in Note 7 of Notes to Consolidated Financial Statements. For purposes of reflectingamounts for other long-term liabilities in the preceding table, we made our best estimate of expected payments for each type of liabilitybased on information available as of December 31, 2017.Summary of Credit FacilitiesInformation about our outstanding borrowings, letters of credit issued, and availability under our credit facilities is reflected in Note 8 ofNotes to Consolidated Financial Statements.Off-Balance Sheet ArrangementsWe have not entered into any transactions, agreements, or other contractual arrangements that would result in off-balance sheetliabilities.Other Matters Impacting Liquidity and Capital ResourcesStock Purchase ProgramsOn September 21, 2016, our board of directors authorized our purchase of up to an additional $2.5 billion of our outstanding commonstock with no expiration date. This authorization was in addition to the remaining amount available under the 2015 program. During thefirst quarter of 2017, we completed our purchases under the 2015 program. As of December 31, 2017, we had $1.2 billion remainingavailable for purchase under the 2016 program. We have no obligation to make purchases under this program.On January 23, 2018, our board of directors authorized our purchase of up to an additional $2.5 billion of our outstanding commonstock with no expiration date.Pension Plan FundingWe plan to contribute approximately $131 million to our pension plans, including discretionary contributions of $100 million, and$19 million to our other postretirement benefit plans during 2018.Environmental MattersOur operations are subject to extensive environmental regulations by governmental authorities relating to the discharge of materials intothe environment, waste management, pollution prevention measures, GHG emissions, and characteristics and composition of gasolinesand distillates. Because environmental laws and regulations are becoming more complex and stringent and new environmental laws andregulations are continuously being enacted or proposed, the level of future expenditures required for environmental matters couldincrease in the future. In addition, any major upgrades in any of our operating facilities could require material additional expenditures tocomply with environmental laws and regulations. See Notes 7 and 9 of Notes to Consolidated Financial Statements for a furtherdiscussion of our environmental matters.58Table of ContentsTax MattersThe IRS has ongoing audits related to our U.S. federal income tax returns from 2010 through 2015, and we have received RevenueAgent Reports (RARs) in connection with the 2010 and 2011 audit. We are contesting certain tax positions and assertions included inthe RARs and continue to make progress in resolving certain of these matters with the IRS. We believe that the ultimate settlement ofthese audits will not be material to our financial position, results of operations, or liquidity.Cash Held by Our International SubsidiariesIn conjunction with our implementation of the provisions under Tax Reform, which was enacted on December 22, 2017 and is morefully described in Note 14 of Notes to Consolidated Financial Statements, we recorded a liability in 2017 for the estimated U.S. federaltax due on the deemed repatriation of the accumulated earnings and profits of our international subsidiaries not previously distributed tous, and we will pay this liability over the eight-year period permitted by the provisions under Tax Reform. Because of the deemedrepatriation of these accumulated earnings and profits, there are no longer any U.S. federal income tax consequences associated withthe repatriation of any of the $3.2 billion of cash and temporary cash investments held by our international subsidiaries as ofDecember 31, 2017. However, certain countries in which our international subsidiaries are organized impose withholding taxes on cashdistributed outside of those countries. We have accrued for withholding taxes on a portion of the cash held by one of our internationalsubsidiaries that we have deemed to not be permanently reinvested in our operations in that country.Cash provided by operating activities in the U.S. continues to be our primary source of funds to finance our U.S. operations and capitalexpenditures, as well as our dividends and share repurchases.Concentration of CustomersOur operations have a concentration of customers in the refining industry and customers who are refined petroleum product wholesalersand retailers. These concentrations of customers may impact our overall exposure to credit risk, either positively or negatively, in thatthese customers may be similarly affected by changes in economic or other conditions. However, we believe that our portfolio ofaccounts receivable is sufficiently diversified to the extent necessary to minimize potential credit risk. Historically, we have not had anysignificant problems collecting our accounts receivable.Sources of LiquidityWe believe that we have sufficient funds from operations and, to the extent necessary, from borrowings under our credit facilities, tofund our ongoing operating requirements. We expect that, to the extent necessary, we can raise additional funds from time to timethrough 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 oradditional credit facilities can be made available on terms that are acceptable to us.NEW ACCOUNTING PRONOUNCEMENTSAs discussed in Note 1 of Notes to Consolidated Financial Statements, certain new financial accounting pronouncements becameeffective January 1, 2018, or will become effective in the future. The effect on our financial statements upon adoption of thesepronouncements is discussed in the above-referenced note.59Table of ContentsCRITICAL ACCOUNTING POLICIES INVOLVING CRITICAL ACCOUNTING ESTIMATESThe preparation of financial statements in accordance with U.S. GAAP requires us to make estimates and assumptions that affect theamounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The followingsummary provides further information about our critical accounting policies that involve critical accounting estimates, and should beread in conjunction with Note 1 of Notes to Consolidated Financial Statements, which summarizes our significant accounting policies.The following accounting policies involve estimates that are considered critical due to the level of subjectivity and judgment involved,as well as the impact on our financial position and results of operations. We believe that all of our estimates are reasonable. Unlessotherwise noted, estimates of the sensitivity to earnings that would result from changes in the assumptions used in determining ourestimates is not practicable due to the number of assumptions and contingencies involved, and the wide range of possible outcomes.Inventory ValuationThe cost of our inventories is principally determined under the last-in, first-out (LIFO) method using the dollar-value LIFO approach.Our LIFO inventories are carried at the lower of cost or market value and our non-LIFO inventories are carried at the lower of cost ornet realizable value. The market value of our LIFO inventories is determined based on the net realizable value of the inventories.We compare the market value of inventories to their cost on an aggregate basis, excluding materials and supplies. In determining themarket value of our inventories, we assume our refinery and ethanol feedstocks are converted into refined products, which requires usto make estimates regarding the refined products expected to be produced from those feedstocks and the conversion costs required toconvert those feedstocks into refined products. We also estimate the usual and customary transportation costs required to move theinventory from our refineries and ethanol plants to the appropriate points of sale. We then apply an estimated selling price to ourinventories. If the aggregate market value is less than cost, we recognize a loss for the difference in our statements of income.The lower of cost or market inventory valuation adjustments for the years ended December 31, 2016 and 2015 are discussed in Note 4of Notes to Consolidated Financial Statements.Environmental MattersOur operations are subject to extensive environmental regulations by governmental authorities relating primarily to the discharge ofmaterials into the environment, waste management, and pollution prevention measures. Future legislative action and regulatoryinitiatives, as discussed in Note 9 of Notes to Consolidated Financial Statements, could result in changes to required operating permits,additional remedial actions, or increased capital expenditures and operating costs that cannot be assessed with certainty at this time.Accruals for environmental liabilities are based on best estimates of probable undiscounted future costs over a 20-year time periodusing currently available technology and applying current regulations, as well as our own internal environmental policies. However,environmental liabilities are difficult to assess and estimate due to uncertainties related to the magnitude of possible remediation, thetiming of such remediation, and the determination of our obligation in proportion to other parties. Such estimates are subject to changedue to many factors, including the identification of new sites requiring remediation, changes in environmental laws and regulations andtheir interpretation, additional information related to the extent and nature of remediation efforts, and potential improvements inremediation technologies.The amount of our accruals for environmental matters as of December 31, 2017 and 2016 are included in Note 7 of Notes toConsolidated Financial Statements.60Table of ContentsPension and Other Postretirement Benefit ObligationsWe have significant pension and other postretirement benefit liabilities and costs that are developed from actuarial valuations. Inherentin these valuations are key assumptions including discount rates, expected return on plan assets, future compensation increases, andhealth care cost trend rates. These assumptions are disclosed and described in Note 12 of Notes to Consolidated Financial Statements.Changes in these assumptions are primarily influenced by factors outside of our control. For example, the discount rate assumptionrepresents a yield curve comprised of various long-term bonds that have an average rating of double-A when averaging all availableratings by the recognized rating agencies, while the expected return on plan assets is based on a compounded return calculatedassuming an asset allocation that is representative of the asset mix in our pension plans. To determine the expected return on planassets, we utilized a forward-looking model of asset returns. The historical geometric average return over the 10 years prior toDecember 31, 2017 was 6.29 percent. The actual return on assets for the years ended December 31, 2017, 2016, and 2015 was19.31 percent, 7.77 percent, and 1.46 percent, respectively. These assumptions can have a significant effect on the amounts reported inour financial statements. For example, a 0.25 percent decrease in the assumptions related to the discount rate or expected return on planassets or a 0.25 percent increase in the assumptions related to the health care cost trend rate or rate of compensation increase wouldhave the following effects on the projected benefit obligation as of December 31, 2017 and net periodic benefit cost for the year endingDecember 31, 2018 (in millions): PensionBenefits OtherPostretirementBenefitsIncrease in projected benefit obligation resulting from: Discount rate decrease$129 $9Compensation rate increase15 n/aHealth care cost trend rate increasen/a 1Increase in expense resulting from: Discount rate decrease12 1Expected return on plan assets decrease6 n/aCompensation rate increase4 n/aHealth care cost trend rate increasen/a —Beginning in 2016, our net periodic benefit cost is determined using the spot-rate approach. Under this approach, our net periodicbenefit cost is impacted by the spot rates of the corporate bond yield curve used to calculate our liability discount rate. If the yield curvewere to flatten entirely and our liability discount rate remained unchanged, our net periodic benefit cost would increase by $12 millionfor pension benefits and $2 million for other postretirement benefits in 2018.See Note 12 of Notes to Consolidated Financial Statements for a further discussion of our pension and other postretirement benefitobligations.Tax MattersWe record tax liabilities based on our assessment of existing tax laws and regulations. A contingent loss related to an indirect tax(excise/duty, sales/use, gross receipts, and/or value-added tax) claim is recorded if the loss is both probable and reasonably estimable.The recording of our tax liabilities requires significant judgments and estimates. Actual tax liabilities can vary from our estimates for avariety of reasons, including different interpretations of tax laws and regulations and different determinations of the amount of tax due,61Table of Contentsincluding penalties and interest. In addition, in determining our income tax provision, we must assess the likelihood that our deferredtax assets, primarily consisting of net operating loss and tax credit carryforwards, will be recovered through future taxable income.Judgment is required in estimating the amount of a valuation allowance, if any, that should be recorded against those deferred incometax assets. If our actual results of operations differ from such estimates or our estimates of future taxable income change, the valuationallowance may need to be revised.In addition, because of the significant and complex changes to the Code from Tax Reform, including the need for regulatory guidancefrom the IRS to properly account for many of the changes, we recorded income taxes for items where reasonable estimates could bemade and we applied the Code on a pre-Tax Reform basis for items where reasonable estimates could not be made, as permitted byStaff Accounting Bulletin No. 118, “Income Tax Accounting Implications of the Tax Cuts and Jobs Act,” issued by the SEC. As aresult, we will record the effect in 2018 for items where we were unable to make a reasonable estimate in 2017, and we may reviseestimates that were recorded in 2017. These amounts could be material. See Note 14 of Notes to Consolidated Financial Statements fora further discussion of our tax liabilities and the impact from Tax Reform on those liabilities.ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKCOMMODITY PRICE RISKWe are exposed to market risks related to the volatility in the price of crude oil, refined petroleum products (primarily gasoline anddistillate), grain (primarily corn), soybean oil, and natural gas used in our operations. To reduce the impact of price volatility on ourresults of operations and cash flows, we use commodity derivative instruments, including swaps, futures, and options to manage thevolatility of:•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 cornpurchases 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 useswaps primarily to manage our price exposure. We also enter into certain commodity derivative instruments for trading purposes to takeadvantage 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 ensurecompliance with our stated risk management policy that has been approved by our board of directors.62Table of ContentsThe following sensitivity analysis includes all positions at the end of the reporting period with which we have market risk (in millions): Derivative Instruments Held For Non-Trading Purposes TradingPurposesDecember 31, 2017: Gain (loss) in fair value resulting from: 10% increase in underlying commodity prices$(47) $410% decrease in underlying commodity prices47 (2) December 31, 2016: Gain (loss) in fair value resulting from: 10% increase in underlying commodity prices61 (22)10% decrease in underlying commodity prices(61) 11See Note 19 of Notes to Consolidated Financial Statements for notional volumes associated with these derivative contracts as ofDecember 31, 2017.COMPLIANCE PROGRAM PRICE RISKWe are exposed to market risk related to the volatility in the price of biofuel credits and GHG emission credits needed to comply withvarious governmental and regulatory programs. To manage these risks, we enter into contracts to purchase these credits when prices aredeemed favorable. Some of these contracts are derivative instruments; however, we elect the normal purchase exception and do notrecord these contracts at their fair values. As of December 31, 2017, there was an immaterial amount of gain or loss in the fair value ofderivative instruments that would result from a 10 percent increase or decrease in the underlying price of the contracts. See Note 19 ofNotes to Consolidated Financial Statements for a discussion about these compliance programs.63Table of ContentsINTEREST RATE RISKThe following table provides information about our debt instruments (dollars in millions), the fair values of which are sensitive tochanges in interest rates. Principal cash flows and related weighted-average interest rates by expected maturity dates are presented. December 31, 2017 Expected Maturity Dates 2018 2019 2020 2021 2022 There-after Total (a) FairValueFixed rate$— $750 $850 $— $— $6,224 $7,824 $9,236Average interest rate—% 9.4% 6.1% —% —% 5.6% 6.0% Floating rate (b)$106 $6 $416 $6 $6 $19 $559 $559Average interest rate2.1% 3.8% 2.9% 3.8% 3.8% 3.8% 2.8% December 31, 2016 Expected Maturity Dates 2017 2018 2019 2020 2021 There-after Total (a) FairValueFixed rate$— $— $750 $850 $— $6,224 $7,824 $8,701Average interest rate—% —% 9.4% 6.1% —% 5.6% 6.0% Floating rate (b)$105 $5 $5 $35 $5 $26 $181 $181Average interest rate1.4% 3.4% 3.4% 2.5% 3.4% 3.4% 2.1% ________________________(a)Excludes unamortized discounts and debt issuance costs.(b)As of December 31, 2017 and 2016, we had an interest rate swap associated with $49 million and $51 million, respectively, of our floating rate debtresulting 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 periodspresented.FOREIGN CURRENCY RISKAs of December 31, 2017, we had commitments to purchase $507 million of U.S. dollars. Our market risk was minimal on thesecontracts, as all of them matured on or before January 31, 2018.64Table of ContentsITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAMANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTINGOur management is responsible for establishing and maintaining adequate “internal control over financial reporting” (as defined inRule 13a-15(f) under the Securities Exchange Act of 1934) for Valero Energy Corporation. Our management evaluated theeffectiveness of Valero’s internal control over financial reporting as of December 31, 2017. In its evaluation, management used thecriteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of theTreadway Commission (COSO). Management believes that as of December 31, 2017, our internal control over financial reporting waseffective based on those criteria.Our independent registered public accounting firm has issued an attestation report on the effectiveness of our internal control overfinancial reporting, which begins on page 67 of this report.65Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMThe board of directors and stockholdersValero Energy Corporation and subsidiaries:Opinion on the Consolidated Financial StatementsWe have audited the accompanying consolidated balance sheets of Valero Energy Corporation and subsidiaries (the Company) as ofDecember 31, 2017 and 2016, the related consolidated statements of income, comprehensive income, equity, and cash flows for eachof the years in the three-year period ended December 31, 2017, and the related notes (collectively, the consolidated financialstatements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of theCompany as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the three-yearperiod ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB),the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control –Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our reportdated February 28, 2018 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financialreporting.Basis for OpinionThese consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express anopinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB andare required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rulesand regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to erroror fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financialstatements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining,on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also includedevaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentationof the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion./s/ KPMG LLPWe have served as the Company’s auditor since 2004.San Antonio, TexasFebruary 28, 201866Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMThe board of directors and stockholdersValero Energy Corporation and subsidiaries:Opinion on Internal Control Over Financial ReportingWe have audited Valero Energy Corporation’s (the Company) internal control over financial reporting as of December 31, 2017, basedon criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of theTreadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financialreporting as of December 31, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued by theCommittee of Sponsoring Organizations of the Treadway Commission.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB),the consolidated balance sheets of the Company as of December 31, 2017 and 2016, the related consolidated statements of income,comprehensive income, equity, and cash flows for each of the years in the three-year period ended December 31, 2017, and the relatednotes (collectively, the consolidated financial statements), and our report dated February 28, 2018 expressed an unqualified opinion onthose consolidated financial statements.Basis for OpinionThe Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment ofthe effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Controlover Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting basedon our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to theCompany in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and ExchangeCommission and the PCAOB.We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit toobtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting,assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal controlbased on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances.We believe that our audit provides a reasonable basis for our opinion.Definition and Limitations of Internal Control Over Financial ReportingA company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accountingprinciples. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of thecompany; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial67Table of Contentsstatements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are beingmade only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assuranceregarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have amaterial effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projectionsof any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes inconditions, or that the degree of compliance with the policies or procedures may deteriorate./s/ KPMG LLPSan Antonio, TexasFebruary 28, 201868Table of ContentsVALERO ENERGY CORPORATIONCONSOLIDATED BALANCE SHEETS(millions of dollars, except par value) December 31, 2017 2016ASSETS Current assets: Cash and temporary cash investments$5,850 $4,816Receivables, net6,922 5,901Inventories6,384 5,709Prepaid expenses and other156 374Total current assets19,312 16,800Property, plant, and equipment, at cost40,010 37,733Accumulated depreciation(12,530) (11,261)Property, plant, and equipment, net27,480 26,472Deferred charges and other assets, net3,366 2,901Total assets$50,158 $46,173LIABILITIES AND EQUITY Current liabilities: Current portion of debt and capital lease obligations$122 $115Accounts payable8,348 6,357Accrued expenses712 694Taxes other than income taxes payable1,321 1,084Income taxes payable568 78Total current liabilities11,071 8,328Debt and capital lease obligations, less current portion8,750 7,886Deferred income tax liabilities4,708 7,361Other long-term liabilities2,729 1,744Commitments 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 issued7 7Additional paid-in capital7,039 7,088Treasury stock, at cost;239,603,534 and 222,000,024 common shares(13,315) (12,027)Retained earnings29,200 26,366Accumulated other comprehensive loss(940) (1,410)Total Valero Energy Corporation stockholders’ equity21,991 20,024Noncontrolling interests909 830Total equity22,900 20,854Total liabilities and equity$50,158 $46,173See Notes to Consolidated Financial Statements.69Table of ContentsVALERO ENERGY CORPORATIONCONSOLIDATED STATEMENTS OF INCOME(millions of dollars, except per share amounts) Year Ended December 31, 2017 2016 2015Operating revenues (a)$93,980 $75,659 $87,804Cost of sales: Cost of materials and other83,037 65,962 73,861Operating expenses (excluding depreciation and amortizationexpense reflected below)4,462 4,207 4,243Depreciation and amortization expense1,934 1,846 1,795Lower of cost or market inventory valuation adjustment— (747) 790Total cost of sales89,433 71,268 80,689Other operating expenses61 — —General and administrative expenses (excluding depreciation andamortization expense reflected below)835 715 710Depreciation and amortization expense52 48 47Asset impairment loss— 56 —Operating income3,599 3,572 6,358Other income, net76 56 46Interest and debt expense, net of capitalized interest(468) (446) (433)Income before income tax expense (benefit)3,207 3,182 5,971Income tax expense (benefit)(949) 765 1,870Net income4,156 2,417 4,101Less: Net income attributable to noncontrolling interests91 128 111Net income attributable to Valero Energy Corporation stockholders$4,065 $2,289 $3,990 Earnings per common share$9.17 $4.94 $8.00Weighted-average common shares outstanding (in millions)442 461 497Earnings per common share – assuming dilution$9.16 $4.94 $7.99Weighted-average common shares outstanding –assuming dilution (in millions)444 464 500Dividends per common share$2.80 $2.40 $1.70_______________________________________________ Supplemental information: (a) Includes excise taxes on sales by certain of our internationaloperations$5,573 $5,493 $5,980See Notes to Consolidated Financial Statements.70Table of ContentsVALERO ENERGY CORPORATIONCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(millions of dollars) Year Ended December 31, 2017 2016 2015Net income$4,156 $2,417 $4,101Other comprehensive income (loss): Foreign currency translation adjustment514 (415) (606)Net gain (loss) on pensionand other postretirement benefits(65) (98) 57Other comprehensive income (loss) beforeincome tax expense (benefit)449 (513) (549)Income tax expense (benefit) related toitems of other comprehensive income (loss)(21) (37) 17Other comprehensive income (loss)470 (476) (566)Comprehensive income4,626 1,941 3,535Less: Comprehensive income attributableto noncontrolling interests91 129 111Comprehensive income attributable toValero Energy Corporation stockholders$4,535 $1,812 $3,424See Notes to Consolidated Financial Statements.71Table of ContentsVALERO ENERGY CORPORATIONCONSOLIDATED STATEMENTS OF EQUITY(millions of dollars) Valero Energy Corporation Stockholders’ Equity CommonStock AdditionalPaid-inCapital TreasuryStock RetainedEarnings AccumulatedOtherComprehensiveIncome (Loss) Total Non-controllingInterests TotalEquityBalance as of December 31, 2014$7 $7,116 $(8,125) $22,046 $(367) $20,677 $567 $21,244Net income— — — 3,990 — 3,990 111 4,101Dividends on common stock— — — (848) — (848) — (848)Stock-based compensation expense— 59 — — — 59 — 59Tax deduction in excess of stock-based compensation expense— 44 — — — 44 — 44Transactions in connection withstock-based compensation plans— (155) (7) — — (162) — (162)Stock purchases under purchase program— — (2,667) — — (2,667) — (2,667)Issuance of Valero Energy Partners LPcommon units— — — — — — 189 189Contributions from noncontrollinginterests— — — — — — 5 5Distributions to noncontrolling interests— — — — — — (45) (45)Other comprehensive loss— — — — (566) (566) — (566)Balance as of December 31, 20157 7,064 (10,799) 25,188 (933) 20,527 827 21,354Net income— — — 2,289 — 2,289 128 2,417Dividends on common stock— — — (1,111) — (1,111) — (1,111)Stock-based compensation expense— 68 — — — 68 — 68Transactions in connection withstock-based compensation plans— (89) 34 — — (55) — (55)Stock purchases under purchase program— — (1,262) — — (1,262) — (1,262)Issuance of Valero Energy Partners LPcommon units— — — — — — 11 11Distributions to noncontrolling interests— — — — — — (65) (65)Other— 45 — — — 45 (72) (27)Other comprehensive income (loss)— — — — (477) (477) 1 (476)Balance as of December 31, 20167 7,088 (12,027) 26,366 (1,410) 20,024 830 20,854Net income— — — 4,065 — 4,065 91 4,156Dividends on common stock— — — (1,242) — (1,242) — (1,242)Stock-based compensation expense— 68 — — — 68 — 68Transactions in connection withstock-based compensation plans— (82) 19 — — (63) — (63)Stock purchases under purchase program— — (1,307) — — (1,307) — (1,307)Issuance of Valero Energy Partners LPcommon units— — — — — — 33 33Contributions from noncontrollinginterests— — — — — — 30 30Distributions to noncontrolling interests— — — — — — (67) (67)Other— (35) — 11 — (24) (8) (32)Other comprehensive income— — — — 470 470 — 470Balance as of December 31, 2017$7 $7,039 $(13,315) $29,200 $(940) $21,991 $909 $22,900See Notes to Consolidated Financial Statements.72Table of ContentsVALERO ENERGY CORPORATIONCONSOLIDATED STATEMENTS OF CASH FLOWS(millions of dollars) Year Ended December 31, 2017 2016 2015Cash flows from operating activities: Net income$4,156 $2,417 $4,101Adjustments to reconcile net income to net cash provided byoperating activities: Depreciation and amortization expense1,986 1,894 1,842Lower of cost or market inventory valuation adjustment— (747) 790Asset impairment loss— 56 —Deferred income tax expense (benefit)(2,543) 230 165Changes in current assets and current liabilities1,289 976 (1,306)Changes in deferred charges and credits andother operating activities, net594 (6) 19Net cash provided by operating activities5,482 4,820 5,611Cash flows from investing activities: Capital expenditures(1,353) (1,278) (1,618)Deferred turnaround and catalyst costs(523) (718) (673)Investments in joint ventures(406) (4) (141)Acquisition of undivided interest(72) — —Capital expenditures of certain variable interest entities(26) — —Other investing activities, net(2) (6) (55)Net cash used in investing activities(2,382) (2,006) (2,487)Cash flows from financing activities: Proceeds from debt issuances or borrowings380 2,153 1,446Repayments of debt and capital lease obligations(21) (1,475) (513)Proceeds from the exercise of stock options10 6 34Purchase of common stock for treasury(1,372) (1,336) (2,838)Common stock dividends(1,242) (1,111) (848)Proceeds from issuance of Valero Energy Partners LP common units36 10 189Contributions from noncontrolling interests30 — 5Distributions to noncontrolling interests(67) (65) (45)Other financing activities, net(26) (194) 25Net cash used in financing activities(2,272) (2,012) (2,545)Effect of foreign exchange rate changes on cash206 (100) (154)Net increase in cash and temporary cash investments1,034 702 425Cash and temporary cash investments at beginning of year4,816 4,114 3,689Cash and temporary cash investments at end of year$5,850 $4,816 $4,114See Notes to Consolidated Financial Statements.73Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS1.DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION, AND SIGNIFICANT ACCOUNTING POLICIESDescription of BusinessAs used in this report, the terms “Valero,” “we,” “us,” or “our” refer to Valero Energy Corporation, one or more of its consolidatedsubsidiaries, or all of them taken as a whole.We are an independent petroleum refiner and ethanol producer. We own 15 petroleum refineries located in the United States (U.S.),Canada, and the United Kingdom (U.K.) with a combined throughput capacity of approximately 3.1 million barrels per day as ofDecember 31, 2017. We sell our refined petroleum products in both the wholesale rack and bulk markets, and approximately7,400 outlets carry our brand names in the U.S., Canada, the U.K., and Ireland. Most of our logistics assets support our refiningoperations, and some of these assets are owned by Valero Energy Partners LP (VLP). See Note 11 for further discussion about VLP. Wealso own 11 ethanol plants in the Mid-Continent region of the U.S. with a combined production capacity of approximately1.45 billion gallons per year as of December 31, 2017. We sell our ethanol in the wholesale bulk market, and some of our logisticsassets support our ethanol operations.Basis of PresentationGeneralThese consolidated financial statements were prepared in accordance with U.S. generally accepted accounting principles (GAAP) andwith the rules and regulations of the U.S. Securities and Exchange Commission (SEC).ReclassificationsEffective January 1, 2017, we revised our reportable segments to reflect a new reportable segment — VLP. The results of the VLPsegment include the results of VLP, our majority-owned master limited partnership. Our prior period segment information has beenretrospectively adjusted to reflect our current segment presentation. See Note 16 for additional information.Certain prior year amounts have been reclassified to conform to the 2017 presentation. The changes were primarily due to the separatepresentation of depreciation and amortization expense related to operating expenses and general and administrative expenses.Significant Accounting PoliciesPrinciples of ConsolidationThese financial statements include those of Valero, our wholly owned subsidiaries, and variable interest entities (VIEs) in which wehave a controlling interest. Our VIEs are described in Note 11. The ownership interests held by others in the VIEs are recorded asnoncontrolling interests. Intercompany items and transactions have been eliminated in consolidation. Investments in less than whollyowned entities where we have significant influence are accounted for using the equity method.Use of EstimatesThe preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect theamounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. On an ongoingbasis, we review our estimates based on currently available information. Changes in facts and circumstances may result in revisedestimates.74Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Temporary Cash InvestmentsOur temporary cash investments are highly liquid, low-risk debt instruments that have a maturity of three months or less when acquired.ReceivablesTrade receivables are carried at original invoice amount. We maintain an allowance for doubtful accounts, which is adjusted based onmanagement’s assessment of our customers’ historical collection experience, known credit risks, and industry and economic conditions.InventoriesThe cost of refinery feedstocks, refined petroleum products, and grain and ethanol inventories is determined under the last-in, first-out(LIFO) method using the dollar-value LIFO approach, with any increments valued based on average purchase prices during the year.Our LIFO inventories are carried at the lower of cost or market. The cost of products purchased for resale and the cost of materials andsupplies are determined principally under the weighted-average cost method. Our non-LIFO inventories are carried at the lower of costor net realizable value. If the aggregate market value of our LIFO inventories or the aggregate net realizable value of our non-LIFOinventories is less than the related aggregate cost, we recognize a loss for the difference in our statements of income.Property, Plant, and EquipmentThe cost of property, plant, and equipment (property assets) purchased or constructed, including betterments of property assets, iscapitalized. However, the cost of repairs to and normal maintenance of property assets is expensed as incurred. Betterments of propertyassets are those that extend the useful life, increase the capacity or improve the operating efficiency of the asset, or improve the safetyof our operations. The cost of property assets constructed includes interest and certain overhead costs allocable to the constructionactivities.Our operations, especially those of our refining segment, are highly capital intensive. Each of our refineries comprises a large base ofproperty assets, consisting of a series of interconnected, highly integrated and interdependent crude oil processing facilities andsupporting logistical infrastructure (Units), and these Units are continuously improved. Improvements consist of the addition of newUnits and betterments of existing Units. We plan for these improvements by developing a multi-year capital program that is updatedand revised based on changing internal and external factors.Depreciation of property assets used in our refining segment is recorded on a straight-line basis over the estimated useful lives of theseassets primarily using the composite method of depreciation. We maintain a separate composite group of property assets for each of ourrefineries. We estimate the useful life of each group based on an evaluation of the property assets comprising the group, and suchevaluations consist of, but are not limited to, the physical inspection of the assets to determine their condition, consideration of themanner in which the assets are maintained, assessment of the need to replace assets, and evaluation of the manner in whichimprovements impact the useful life of the group. The estimated useful lives of our composite groups range primarily from 25 to30 years.Under the composite method of depreciation, the cost of an improvement is added to the composite group to which it relates and isdepreciated over that group’s estimated useful life. We design improvements to our75Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)refineries in accordance with engineering specifications, design standards, and practices accepted in our industry, and theseimprovements have design lives consistent with our estimated useful lives. Therefore, we believe the use of the group life to depreciatethe cost of improvements made to the group is reasonable because the estimated useful life of each improvement is consistent with thatof the group.Also under the composite method of depreciation, the historical cost of a minor property asset (net of salvage value) that is retired orreplaced is charged to accumulated depreciation and no gain or loss is recognized in income. However, a gain or loss is recognized inincome for a major property asset that is retired, replaced, sold, or for an abnormal disposition of a property asset (primarily involuntaryconversions). Gains and losses are reflected in depreciation and amortization expense, unless such amounts are reported separately dueto materiality.Depreciation of property assets used in our ethanol segment is recorded on a straight-line basis over the estimated useful lives of therelated assets.Leasehold improvements are amortized on a straight-line basis over the shorter of the lease term or the estimated useful life of therelated asset. Assets acquired under capital leases are amortized on a straight-line basis over (i) the lease term if transfer of ownershipdoes not occur at the end of the lease term or (ii) the estimated useful life of the asset if transfer of ownership does occur at the end ofthe lease term.Deferred Charges and Other Assets“Deferred charges and other assets, net” primarily include the following:•turnaround costs, which are incurred in connection with planned major maintenance activities at our refineries and ethanolplants and which are deferred when incurred and amortized on a straight-line basis over the period of time estimated to lapseuntil the next turnaround occurs;•fixed-bed catalyst costs, representing the cost of catalyst that is changed out at periodic intervals when the quality of the catalysthas deteriorated beyond its prescribed function, which are deferred when incurred and amortized on a straight-line basis overthe estimated useful life of the specific catalyst;•income taxes receivable;•investments in joint ventures accounted for under the equity method; and•intangible assets.Impairment of AssetsLong-lived assets are tested for recoverability whenever events or changes in circumstances indicate that the carrying amount of theasset may not be recoverable. A long-lived asset is not recoverable if its carrying amount exceeds the sum of the undiscounted cashflows expected to result from its use and eventual disposition. If a long-lived asset is not recoverable, an impairment loss is recognizedfor the amount by which the carrying amount of the long-lived asset exceeds its fair value, with fair value determined based ondiscounted estimated net cash flows or other appropriate methods.76Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)We evaluate our equity method investments for impairment when there is evidence that we may not be able to recover the carryingamount of our investments or the investee is unable to sustain an earnings capacity that justifies the carrying amount. A loss in the valueof an investment that is other than a temporary decline is recognized currently in income, and is based on the difference between theestimated current fair value of the investment and its carrying amount.Environmental MattersLiabilities for future remediation costs are recorded when environmental assessments and/or remedial efforts are probable and the costscan be reasonably estimated. Other than for assessments, the timing and magnitude of these accruals generally are based on thecompletion of investigations or other studies or a commitment to a formal plan of action. Amounts recorded for environmental liabilitieshave not been reduced by possible recoveries from third parties and have not been measured on a discounted basis.Asset Retirement ObligationsWe record a liability, which is referred to as an asset retirement obligation, at fair value for the estimated cost to retire a tangible long-lived asset at the time we incur that liability, which is generally when the asset is purchased, constructed, or leased. We record theliability when we have a legal obligation to incur costs to retire the asset and when a reasonable estimate of the fair value of the liabilitycan be made. If a reasonable estimate cannot be made at the time the liability is incurred, we record the liability when sufficientinformation is available to estimate the liability’s fair value.We have asset retirement obligations with respect to certain of our refinery assets due to various legal obligations to clean and/ordispose of various component parts of each refinery at the time they are retired. However, these component parts can be used forextended and indeterminate periods of time as long as they are properly maintained and/or upgraded. In addition, we have assetretirement obligations with respect to our ethanol plants and certain of our logistics assets that require us to perform under law orcontract once the asset is retired from service. It is our practice and current intent to maintain all our assets and continue makingimprovements to those assets based on technological advances. As a result, we believe that our refineries, ethanol plants, and logisticsassets have indeterminate lives for purposes of estimating asset retirement obligations because dates or ranges of dates upon which wewould retire such assets cannot reasonably be estimated at this time. We will recognize a liability at such time when sufficientinformation exists to estimate a date or range of potential settlement dates that is needed to employ a present value technique to estimatefair value.Foreign Currency TranslationThe functional currency of each of our international operations is the respective local currency, which includes the Canadian dollar, thepound sterling, the euro, and the Mexican peso. Balance sheet accounts are translated into U.S. dollars using exchange rates in effect asof the balance sheet date. Revenue and expense accounts are translated using the weighted-average exchange rates during the yearpresented. Foreign currency translation adjustments are recorded as a component of accumulated other comprehensive loss.Revenue RecognitionRevenues for products sold by our refining and ethanol segments are recorded upon delivery and transfer of title to the products to ourcustomers and when payment has either been received or collection is reasonably assured. Our VLP segment generates revenues byproviding fee-based transportation and terminaling services77Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)to transport and store crude oil and refined petroleum products using its pipelines and terminals under long-term commercialagreements. VLP segment revenues are recognized upon completion of the transportation or terminaling service. However, becauseVLP segment revenues are intersegment revenues with our refining segment, all VLP segment revenues are eliminated in consolidation.We present excise taxes on sales by certain of our international operations on a gross basis in revenues. The amount of such taxes isprovided in supplemental information in a footnote on the statements of income. All other excise taxes are presented on a net basis.We enter into certain purchase and sale arrangements with the same counterparty that are deemed to be made in contemplation of oneanother. We combine these transactions and present the net effect in cost of materials and other. We also enter into refined petroleumproduct exchange transactions to fulfill sales contracts with our customers by accessing refined petroleum products in markets wherewe do not operate our own refineries. These refined petroleum product exchanges are accounted for as exchanges of non-monetaryassets, and no revenues are recorded on these transactions.Cost Classifications“Cost of materials and other” primarily includes the cost of materials that are a component of our products sold. These costs include(i) the direct cost of materials (such as crude oil and other refinery feedstocks, refined petroleum products and blendstocks, and ethanolfeedstocks and products) that are a component of our products sold; (ii) costs related to the delivery (such as shipping and handlingcosts) of products sold; (iii) costs related to our environmental credit obligations to comply with various governmental and regulatoryprograms (such as the cost of Renewable Identification Numbers (RINs) as required by the U.S. Environmental Protection Agency’s(EPA) Renewable Fuel Standard and emission credits under various cap-and-trade systems, as defined in Note 18); (iv) gains and losseson our commodity derivative instruments; and (v) certain excise taxes.“Operating expenses (excluding depreciation and amortization expense)” include costs to operate our refineries, ethanol plants, andlogistics assets, except for depreciation and amortization expense. These costs primarily include employee-related expenses, energy andutility costs, catalysts and chemical costs, and repair and maintenance expenses.“Depreciation and amortization expense” associated with our operations is separately presented in our statement of income as acomponent of cost of sales and general and administrative expenses and is disclosed by reportable segment in Note 16.“Other operating expenses” include costs, if any, incurred by our reportable segments that are not associated with our cost of sales.Environmental Compliance Program CostsWe purchase credits in the open market to meet our obligations under various environmental compliance programs. We purchasebiofuel credits (primarily RINs in the U.S.) to comply with government regulations that require us to blend a certain percentage ofbiofuels into the products we produce. To the degree that we are unable to blend biofuels at the required percentage, we must purchasebiofuel credits to meet our obligation. We purchase greenhouse gas (GHG) emission credits to comply with government regulations78Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)concerning various GHG emission programs, including cap-and-trade systems. These programs are further described in Note 19 under“Environmental Compliance Program Price Risk.”The costs of purchased biofuel credits and GHG emission credits are charged to cost of materials and other as such credits are needed tosatisfy our obligation. To the extent we have not purchased enough credits to satisfy our obligation as of the balance sheet date, wecharge cost of materials and other for such deficiency based on the market price of the credits as of the balance sheet date, and werecord a liability for our obligation to purchase those credits. See Note 18 for disclosure of our fair value liability.Stock-Based CompensationCompensation expense for our share-based compensation plans is based on the fair value of the awards granted and is recognized inincome on a straight-line basis over the shorter of (a) the requisite service period of each award or (b) the period from the grant date tothe date retirement eligibility is achieved if that date is expected to occur during the vesting period established in the award.Income TaxesIncome taxes are accounted for under the asset and liability method. Under this method, deferred tax assets and liabilities arerecognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existingassets and liabilities and their respective tax bases. Deferred amounts are measured using enacted tax rates expected to apply to taxableincome in the year those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced byunrecognized tax benefits, if such items may be available to offset the unrecognized tax benefit.We have elected to classify any interest expense and penalties related to the underpayment of income taxes in income tax expense.Earnings per Common ShareEarnings per common share is computed by dividing net income attributable to Valero stockholders by the weighted-average number ofcommon shares outstanding for the year. Participating share-based payment awards, including shares of restricted stock granted undercertain of our stock-based compensation plans, are included in the computation of basic earnings per share using the two-class method.Earnings per common share – assuming dilution reflects the potential dilution arising from our outstanding stock options and nonvestedshares granted to employees in connection with our stock-based compensation plans. Potentially dilutive securities are excluded fromthe computation of earnings per common share – assuming dilution when the effect of including such shares would be antidilutive.Financial InstrumentsOur financial instruments include cash and temporary cash investments, receivables, payables, debt, capital lease obligations,commodity derivative contracts, and foreign currency derivative contracts. The estimated fair values of these financial instrumentsapproximate their carrying amounts, except for certain debt as discussed in Note 18.Derivatives and HedgingAll derivative instruments, not designated as normal purchases or sales, are recorded in the balance sheet as either assets or liabilitiesmeasured at their fair values with changes in fair value recognized currently in79Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)income. To manage commodity price risk, we use economic hedges, which are not designated as fair value or cash flow hedges, andwe use fair value and cash flow hedges from time to time. We also enter into certain commodity derivative instruments for tradingpurposes. The cash flow effects of all of our derivative instruments are reflected in operating activities in the statements of cash flows.Business CombinationsEffective January 1, 2017, we adopted the provisions of Accounting Standards Update (ASU) No. 2017-01, “Business Combinations(Topic 805),” that was issued by the Financial Accounting Standards Board (FASB) in January 2017. This ASU provides a more robustframework to evaluate whether transactions should be accounted for as acquisitions (dispositions) of assets or businesses. Our adoptionof this ASU did not affect our financial position or results of operations. However, more of our future acquisitions may be accounted foras acquisitions of assets in accordance with this ASU.Accounting Pronouncements Adopted on January 1, 2018ASU No. 2014-09In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” to clarify the principles forrecognizing revenue. This new standard is effective for annual reporting periods beginning after December 15, 2017, including interimreporting periods within those annual periods. We adopted this standard on January 1, 2018 and it will not materially change theamount or timing of revenues recognized by us, nor will it materially affect our financial position. The majority of our revenues aregenerated from the sale of refined petroleum products and ethanol. These revenues are largely based on the current spot (market) pricesof the products sold, which represent consideration specifically allocable to the products being sold on a given day, and we recognizethose revenues upon delivery and transfer of title to the products to our customers. The time at which delivery and transfer of titleoccurs is the point when our control of the products is transferred to our customers and when our performance obligation to ourcustomers is fulfilled.We adopted this new standard on January 1, 2018 using the modified retrospective method as permitted by the standard. Under thismethod, the cumulative effect of initially applying the standard is recognized as an adjustment to the opening balance of retainedearnings, and revenues reported in the periods prior to the date of adoption are not changed. Because the adoption of this standard didnot materially impact the manner in which we recognize revenues, we will not make such an adjustment to retained earnings. Wecontinue to develop our revenue disclosures and have enhanced our accounting systems to enable the preparation of such disclosures.ASU No. 2016-01In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments—Overall (Subtopic 825-10),” to enhance the reportingmodel for financial instruments regarding certain aspects of recognition, measurement, presentation, and disclosure. The provisions ofthis ASU are effective for annual reporting periods beginning after December 15, 2017, and interim reporting periods within thoseannual periods. This ASU is to be applied using a cumulative-effect adjustment to the balance sheet as of the beginning of the year ofadoption. The adoption of this ASU effective January 1, 2018 did not affect our financial position nor will it affect our results ofoperations, but it will result in revised disclosures.80Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)ASU No. 2017-07In March 2017, the FASB issued ASU No. 2017-07, “Compensation—Retirement Benefits (Topic 715),” which requires employers toreport the service cost component of net periodic pension cost and net periodic postretirement benefit cost in the same line item as othercompensation costs arising from services rendered by the pertinent employees during the period. It also requires the other componentsof net periodic pension cost and net periodic postretirement benefit cost (non-service cost components) to be presented in the incomestatement separately from the service cost component and outside a subtotal of income from operations. This ASU is to be appliedretrospectively for income statement items and prospectively for any capitalized benefit costs. The adoption of this ASU effectiveJanuary 1, 2018 did not affect our financial position or results of operations, but will result in the reclassification of the non-service costcomponents from operating expenses (excluding depreciation and amortization) and general and administrative expenses (excludingdepreciation and amortization) to “other income, net.”ASU No. 2017-09In May 2017, the FASB issued ASU No. 2017-09, “Compensation—Stock Compensation (Topic 718),” 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. The adoption ofthis ASU effective January 1, 2018 did not have an immediate effect on our financial position or results of operations as it will beapplied prospectively to an award modified on or after adoption.Accounting Pronouncements Not Yet AdoptedASU No. 2016-02In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” to increase the transparency and comparability amongorganizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasingarrangements. This new standard is effective for annual reporting periods beginning after December 15, 2018, and interim reportingperiods within those annual periods, with early adoption permitted. We will adopt this new standard on January 1, 2019, and we expectto use the modified retrospective method of adoption. We are enhancing our contracting and lease evaluation systems and relatedprocesses, and we are developing a new lease accounting system to capture our leases and support the required disclosures. During2018, we will continue to monitor the adoption process to ensure compliance with accounting and disclosure requirements. We alsocontinue the integration of our lease accounting system with our general ledger, and we will make modifications to the relatedprocurement and payment processes. We anticipate this standard will have a material impact on our financial position by increasing ourassets and liabilities by equal amounts through the recognition of right-of-use assets and lease liabilities for our operating leases.However, we do not expect adoption to have a material impact on our results of operations or liquidity. We expect our accounting forcapital leases to remain substantially unchanged.ASU No. 2017-12In August 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging (Topic 815),” to improve and simplify accountingguidance 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 managecommodity price risk; however, we have not designated these hedges as fair value or cash flow hedges. As a result, the adoption of thisASU effective January 1, 2019 is not expected to affect our financial position or results of operations.81Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)ASU No. 2018-02In February 2018, the FASB issued ASU No. 2018-02, “Income Statement—Reporting Comprehensive Income (Topic 220),” whichallows for the reclassification from accumulated other comprehensive income to retained earnings for the stranded tax effects resultingfrom the Tax Cuts and Jobs Act of 2017 (Tax Reform), as discussed in Note 14. The provisions of this ASU are effective for annualreporting periods beginning after December 15, 2018, and interim reporting periods within those annual periods, with early adoptionpermitted. This ASU shall be applied at the beginning of the annual or interim period of adoption or retrospectively to each period inwhich the income tax effects of Tax Reform affects the items remaining in accumulated other comprehensive income. The adoption ofthis ASU is not expected to affect our financial position or results of operations, but will result in the reclassification of the income taxeffects of Tax Reform and additional disclosures.2.ARUBA DISPOSITIONEffective October 1, 2016, we (i) transferred ownership of all of our assets in Aruba, other than certain hydrocarbon inventories andworking capital, to Refineria di Aruba N.V., an entity wholly-owned by the Government of Aruba (GOA), (ii) settled our obligationsunder various agreements with the GOA, including agreements that required us to dismantle our leasehold improvements under certainconditions, and (iii) sold the working capital of our Aruba operations, including hydrocarbon inventories, to the GOA and CITGO(defined below). We refer to this transaction as the “Aruba Disposition.” The agreements associated with the Aruba Disposition werefinalized in September 2016, including approval of such agreements by the Aruba Parliament. We no longer own any assets or haveany operations in Aruba.In September 2016 and in connection with the Aruba Disposition, our U.S. subsidiaries were unable to collect outstanding debtobligations owed to them by our Aruba subsidiaries, which resulted in the recognition by us of an income tax benefit in the U.S. of$42 million during the year ended December 31, 2016. We had no income tax effect in Aruba from the cancellation of debt or othereffects of the Aruba Disposition because of net operating loss carryforwards associated with our operations in Aruba against which wehad previously recorded a full valuation allowance.Prior to the Aruba Disposition, we recognized an asset impairment loss of $56 million in June 2016 representing all of the remainingcarrying value of our long-lived assets in Aruba. These assets were primarily related to our crude oil and refined petroleum productsterminal and transshipment facility in Aruba (collectively, the Aruba Terminal), which were included in our refining segment. Werecognized the impairment loss at that time because we concluded that it was more likely than not that we would ultimately transferownership of these assets to the GOA as a result of agreements entered into in June 2016 between the GOA, CITGO Aruba RefiningN.V. (CAR), and CITGO Petroleum Corporation (together with CAR and certain other affiliates, collectively, CITGO) providing for,among other things, the GOA’s lease of those assets to CITGO. (See Note 18 for disclosure related to the method to determine fairvalue.)82Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)3.RECEIVABLESReceivables consisted of the following (in millions): December 31, 2017 2016Accounts receivable$6,786 $5,687Commodity derivative and foreign currencycontract receivables102 129Other receivables67 117 6,955 5,933Allowance for doubtful accounts(33) (32)Receivables, net$6,922 $5,901There were no significant changes in our allowance for doubtful accounts during the years ended December 31, 2017, 2016, and 2015. 4.INVENTORIESInventories consisted of the following (in millions): December 31, 2017 2016Refinery feedstocks$2,427 $2,068Refined petroleum products and blendstocks3,459 3,153Ethanol feedstocks and products242 238Materials and supplies256 250Inventories$6,384 $5,709As of December 31, 2017 and 2016, the replacement cost (market value) of LIFO inventories exceeded their LIFO carrying amounts by$3.0 billion and $1.9 billion, respectively. As of December 31, 2017 and 2016, our non-LIFO inventories accounted for $1.0 billionand $641 million, respectively, of our total inventories.During the year ended December 31, 2016, we recorded a change in our lower of cost or market inventory valuation reserve thatresulted in a net benefit to our results of operations of $747 million, and we had a liquidation of LIFO inventory layers that increasedcost of sales by $120 million.During the year ended December 31, 2015, we recorded a lower of cost or market inventory valuation adjustment that resulted in a netcharge to our results of operations of $790 million in order to state our inventories at market as of December 31, 2015.83Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)5.PROPERTY, PLANT, AND EQUIPMENTMajor classes of property, plant, and equipment, including assets held under capital leases, consisted of the following (in millions): December 31, 2017 2016Land $411 $400Crude oil processing facilities 30,109 29,754Transportation and terminaling facilities 4,335 3,692Grain processing equipment 903 855Administrative buildings 910 838Other 2,068 1,464Construction in progress 1,274 730Property, plant, and equipment, at cost 40,010 37,733Accumulated depreciation (12,530) (11,261)Property, plant, and equipment, net $27,480 $26,472We have various assets under capital leases that primarily support our refining operations totaling $635 million and $118 million as ofDecember 31, 2017 and 2016, respectively. Accumulated amortization on assets under capital leases was $72 million and $45 millionas of December 31, 2017 and 2016, respectively.Depreciation expense was $1.3 billion for each of the years in the three-year period ended December 31, 2017.6.DEFERRED CHARGES AND OTHER ASSETS“Deferred charges and other assets, net” consisted of the following (in millions): December 31, 2017 2016Deferred turnaround and catalyst costs, net$1,520 $1,614Income taxes receivable673 447Investments in joint ventures530 201Intangible assets, net142 148Other501 491Deferred charges and other assets, net$3,366 $2,901Amortization expense for the deferred charges and other assets shown above was $650 million, $575 million, and $542 million for theyears ended December 31, 2017, 2016, and 2015, respectively.84Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)7.ACCRUED EXPENSES AND OTHER LONG-TERM LIABILITIESAccrued expenses and other long-term liabilities consisted of the following (in millions): AccruedExpenses Other Long-Term Liabilities December 31, December 31, 2017 2016 2017 2016Defined benefit plan liabilities (see Note 12)$33 $32 $776 $742Wage and other employee-related liabilities278 225 111 103Uncertain income tax position liabilities (see Note 14)— — 723 465Repatriation tax liability (see Note 14)— — 597 —Environmental liabilities30 29 232 223Environmental credit obligations (see Note 18)152 214 — —Accrued interest expense105 104 — —Other accrued liabilities114 90 290 211Accrued expenses and other long-term liabilities$712 $694 $2,729 $1,744There were no significant changes in our environmental liabilities during each of the years in the three-year period ended December 31,2017.85Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)8.DEBT AND CAPITAL LEASE OBLIGATIONSDebt, at stated values, and capital lease obligations consisted of the following (in millions): FinalMaturity December 31, 2017 2016Bank credit facilities: Valero Revolver2020 $— $—VLP Revolver2020 410 30Canadian Revolver2018 — —Accounts receivable sales facility2018 100 100Non-bank debt: Valero Senior Notes 6.625%2037 1,500 1,5003.4%2026 1,250 1,2506.125%2020 850 8509.375%2019 750 7507.5%2032 750 7504.9%2045 650 6503.65%2025 600 60010.5%2039 250 2508.75%2030 200 2007.45%2097 100 1006.75%2037 24 24VLP Senior Notes, 4.375%2026 500 500Gulf Opportunity Zone Revenue Bonds, Series 2010, 4.0%2040 300 300Debenture, 7.65%2026 100 100Other debt2023 49 51Net unamortized debt issuance costs and other (73) (79)Total debt 8,310 7,926Capital lease obligations 562 75Total debt and capital lease obligations 8,872 8,001Less current portion 122 115Debt and capital lease obligations, less current portion $8,750 $7,88686Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Bank Credit FacilitiesValero RevolverWe have a $3 billion revolving credit facility (the Valero Revolver) with a group of financial institution lenders that matures inNovember 2020. We have the option to increase the aggregate commitments under the Valero Revolver to $4.5 billion and we mayrequest two additional one-year extensions, subject to certain conditions. The Valero Revolver also provides for the issuance of lettersof credit of up to $2.0 billion.Outstanding borrowings under the Valero Revolver bear interest, at our option, at either (a) the adjusted LIBO rate (as defined in theValero Revolver) for the applicable interest period in effect from time to time plus the applicable margin or (b) the alternate base rate (asdefined in the Valero Revolver) plus the applicable margin. The Valero Revolver also requires payments for customary fees, includingfacility fees, letter of credit participation fees, and administrative agent fees. The interest rate and facility fees under the Valero Revolverare subject to adjustment based upon the credit ratings assigned to our senior unsecured debt.We had no borrowings or repayments under the Valero Revolver during the years ended December 31, 2017, 2016, and 2015.VLP RevolverVLP has a $750 million senior unsecured revolving credit facility (the VLP Revolver) with a group of lenders that matures in November2020. The VLP Revolver is available only to the operations of VLP, and creditors of VLP do not have recourse against Valero. VLP hasthe option to increase the aggregate commitments under the VLP Revolver to $1.0 billion and VLP may request two additional one-yearextensions, subject to certain conditions. VLP may terminate the VLP Revolver with notice to the lenders of at least three business daysprior to termination. The VLP Revolver also provides for the issuance of letters of credit of up to $100 million. As a result of VLPobtaining an investment grade rating with respect to its issuance of senior notes in December 2016, VLP’s directly owned subsidiary,Valero Partners Operating Co. LLC, was released of its guarantee under the VLP Revolver.Outstanding borrowings under the VLP Revolver bear interest, at VLP’s option, at either (a) the adjusted LIBO rate (as defined in theVLP Revolver) for the applicable interest period in effect from time to time plus the applicable margin or (b) the alternate base rate (asdefined in the VLP Revolver) plus the applicable margin. As of December 31, 2017 and 2016, the variable rate was 2.875 percent and2.3125 percent, respectively. The VLP Revolver requires payments for customary fees, including commitment fees, letter of creditparticipation fees, and administrative agent fees. The VLP Revolver contains certain restrictive covenants, including a covenant thatrequires VLP to maintain a ratio of total debt to EBITDA (as defined in the VLP Revolver) for the prior four fiscal quarters of notgreater than 5.0 to 1.0 as of the last day of each fiscal quarter, and limitations on VLP’s ability to pay distributions to its unitholders.During the year ended December 31, 2017, VLP borrowed $118 million and $262 million under the VLP Revolver in connection withVLP’s acquisitions from us of Parkway Pipeline LLC and Valero Partners Port Arthur, LLC, respectively, and had no repayments underthe VLP Revolver. During the year ended December 31, 2016, VLP borrowed $139 million and $210 million under the VLP Revolverin connection with VLP’s acquisitions from us of the McKee Terminal Services Business and the Meraux and Three Rivers TerminalServices Business, respectively, and repaid $494 million on the VLP Revolver. During the year87Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)ended December 31, 2015, VLP borrowed $200 million under the VLP Revolver in connection with VLP’s acquisition from us of theHouston and St. Charles Terminal Services Business and repaid $25 million on the VLP Revolver.Canadian RevolverIn October 2017, one of our Canadian subsidiaries amended its committed revolving credit facility (the Canadian Revolver) to increasethe borrowing capacity from C$25 million to C$75 million under which it may borrow and obtain letters of credit and to extend thematurity date from November 2017 to November 2018.We had no borrowings or repayments under the Canadian Revolver during the years ended December 31, 2017, 2016, and 2015.Accounts Receivable Sales FacilityWe have an accounts receivable sales facility with a group of third-party entities and financial institutions to sell up to $1.3 billion ofeligible trade receivables on a revolving basis. In July 2017, we amended our agreement to extend the maturity date to July 2018.Proceeds from the sale of receivables under this facility are reflected as debt. Under this program, one of our marketing subsidiaries(Valero Marketing) sells eligible receivables, without recourse, to another of our subsidiaries (Valero Capital), whereupon thereceivables are no longer owned by Valero Marketing. Valero Capital, in turn, sells an undivided percentage ownership interest in theeligible receivables, without recourse, to the third-party entities and financial institutions. To the extent that Valero Capital retains anownership interest in the receivables it has purchased from Valero Marketing, such interest is included in our financial statements solelyas a result of the consolidation of the financial statements of Valero Capital with those of Valero Energy Corporation; the receivablesare not available to satisfy the claims of the creditors of Valero Marketing or Valero Energy Corporation.As of December 31, 2017 and 2016, $2.3 billion and $2.0 billion, respectively, of our accounts receivable composed the designatedpool of accounts receivable included in the program. All amounts outstanding under the accounts receivable sales facility are reflectedas debt on our balance sheets and proceeds and repayments are reflected as cash flows from financing activities on the statements ofcash flows. As of December 31, 2017 and 2016, the variable interest rate on the accounts receivable sales facility was 2.0387 percentand 1.3422 percent, respectively. During the years ended December 31, 2017, 2016, and 2015, we had no proceeds from orrepayments under the accounts receivable sales facility.88Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Summary of Credit FacilitiesWe had outstanding borrowings, letters of credit issued, and availability under our credit facilities as follows (in millions): December 31, 2017 FacilityAmount Maturity Date OutstandingBorrowings Letters ofCredit Issued Availability Committed facilities: Valero Revolver $3,000 November 2020 $— $54 $2,946VLP Revolver $750 November 2020 $410 $— $340Canadian Revolver C$75 November 2018 C$— C$10 C$65Accounts receivablesales facility $1,300 July 2018 $100 n/a $1,200Letter of credit facility $100 November 2018 n/a $— $100Uncommitted facilities: Letter of credit facilities n/a n/a n/a $249 n/aLetters of credit issued as of December 31, 2017 expire at various times in 2018 through 2020.In June 2017, one of our committed letter of credit facilities with a borrowing capacity of $125 million expired and was not renewed. InNovember 2017, the remaining committed letter of credit facility with a borrowing capacity of $100 million was amended to extend thematurity date from November 2017 to November 2018.We are charged letter of credit issuance fees under our various uncommitted short-term bank credit facilities. These uncommitted creditfacilities have no commitment fees or compensating balance requirements.Non-Bank DebtThere was no issuance or redemption activity related to our non-bank debt during the year ended December 31, 2017.During the year ended December 31, 2016, the following activity occurred:•We issued $1.25 billion of 3.4 percent Senior Notes due September 15, 2026. Proceeds from this debt issuance totaled$1.246 billion. We also incurred $10 million of debt issuance costs.•We redeemed our 6.125 percent Senior Notes with a maturity date of June 15, 2017 for $778 million, or 103.70 percent ofstated value.•We redeemed our 7.2 percent Senior Notes with a maturity date of October 15, 2017 for $213 million, or 106.27 percent ofstated value.•VLP issued $500 million of 4.375 percent Senior Notes due December 15, 2026. Proceeds from this debt issuance totaled$500 million. Debt issuance costs totaled $4 million.89Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)During the year ended December 31, 2015, the following activity occurred:•We issued $600 million of 3.65 percent Senior Notes due March 15, 2025 and $650 million of 4.9 percent Senior Notes dueMarch 15, 2045. Proceeds from these debt issuances totaled $1.246 billion. We also incurred $12 million of debt issuance costs.•We made scheduled debt repayments of $400 million related to our 4.5 percent Senior Notes and $75 million related to our8.75 percent debentures.Capital Lease ObligationsWe have capital lease obligations that mature at various dates through 2046 for storage tanks, terminal facilities, and other assets thatare used in our refining operations. In January 2017, we recognized capital lease assets and related obligations totaling approximately$490 million for the lease of storage tanks located at three of our refineries. These lease agreements have initial terms of 10 years eachwith successive 10-year automatic renewals.Other DisclosuresInterest and debt expense, net of capitalized interest is comprised as follows (in millions): Year Ended December 31, 2017 2016 2015Interest and debt expense$539 $511 $504Less capitalized interest71 65 71Interest and debt expense, net ofcapitalized interest$468 $446 $433Our credit facilities and other debt arrangements contain various customary restrictive covenants, including cross-default and cross-acceleration clauses.90Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Principal maturities for our debt obligations and future minimum rentals on capital lease obligations as of December 31, 2017 were asfollows (in millions): Debt CapitalLeaseObligations2018$106 $552019756 5520201,266 5320216 5220226 54Thereafter6,243 969Net unamortized debt issuancecosts and other(73) n/aTotal minimum lease paymentsn/a 1,238Less amount representing interestn/a 676Total$8,310 $5629.COMMITMENTS AND CONTINGENCIESOperating LeasesWe have long-term operating lease commitments for land, office facilities and equipment, transportation equipment, time charters forocean-going tankers and coastal vessels, dock facilities, and various facilities and equipment used in the storage, transportation,production, and sale of refinery feedstock, refined petroleum product and corn inventories.Certain leases for processing equipment and feedstock and refined petroleum product storage facilities provide for various contingentpayments based on, among other things, throughput volumes in excess of a base amount. Certain leases for vessels contain renewaloptions and escalation clauses, which vary by charter, and provisions for the payment of chartering fees, which either vary based onusage or provide for payments, in addition to established minimums, that are contingent on usage. In most cases, we expect that in thenormal course of business, our leases will be renewed or replaced by other leases.91Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)As of December 31, 2017, our future minimum rentals for leases having initial or remaining noncancelable lease terms in excess ofone year were as follows (in millions):2018$359201923620201482021104202274Thereafter366Total minimum rental payments$1,287Minimum rentals to be receivedunder subleases$15“Rental expense, net of sublease rental income” was as follows (in millions): Year Ended December 31, 2017 2016 2015Minimum rental expense$691 $739 $732Contingent rental expense21 70 105Total rental expense712 809 837Less sublease rental income54 31 46Rental expense, net ofsublease rental income$658 $778 $791Purchase ObligationsWe have various purchase obligations under certain industrial gas and chemical supply arrangements (such as hydrogen supplyarrangements), crude oil and other feedstock supply arrangements, and various throughput and terminaling agreements. We enter intothese contracts to ensure an adequate supply of utilities and feedstock and adequate storage capacity to operate our refineries andethanol plants. Substantially all of our purchase obligations are based on market prices or adjustments based on market indices. Certainof these purchase obligations include fixed or minimum volume requirements, while others are based on our usage requirements. Noneof these obligations are associated with suppliers’ financing arrangements. These purchase obligations are not reflected as liabilities.Other CommitmentsMVP TerminalWe have a 50 percent membership interest in MVP Terminalling, LLC (MVP), a Delaware limited liability company formed inSeptember 2017 with a subsidiary of Magellan Midstream Partners LP (Magellan), to construct, own, and operate the Magellan ValeroPasadena marine terminal (MVP Terminal) located adjacent to the Houston Ship Channel in Pasadena, Texas. The MVP Terminal willcontain (i) approximately 5 million barrels of storage capacity, (ii) a dock with two ship berths, and (iii) a three-bay truck rack facility.In connection with our terminaling agreement with MVP, described below, we will have dedicated use of (i) approximately 4 millionbarrels of storage, (ii) one ship berth, and (iii) the three-bay truck rack facility.92Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Construction of phases one and two of the project began in 2017 with a total estimated cost of $840 million, of which we havecommitted to contribute 50 percent (approximately $420 million). The project could expand up to four phases with a total project costof approximately $1.4 billion if warranted by additional demand and agreed to by Magellan and us. We have contributed $81 million toMVP through December 2017.Concurrent with the formation of MVP, we entered into a terminaling agreement with MVP to utilize the MVP Terminal uponcompletion of phase two, which is expected to occur in early 2020. The terminaling agreement has an initial term of 12 years withtwo five-year automatic renewals, and year-to-year renewals thereafter.Due to our membership interest in MVP and because the terminaling agreement was determined to be a capital lease, we are theaccounting owner of the MVP Terminal during the construction period. Accordingly, as of December 31, 2017, we recorded an asset of$174 million in property, plant, and equipment representing 100 percent of the construction costs incurred by MVP, as well ascapitalized interest incurred by us, and a long-term liability of $94 million payable to Magellan. The amounts recorded for the portionof the construction costs associated with the payable to Magellan are noncash investing and financing items, respectively.Central Texas Pipeline and Terminal ProjectsWe have committed to a 40 percent undivided interest in a project with a subsidiary of Magellan to jointly build an estimated 135-mile,20-inch refined petroleum products pipeline with a capacity of up to 150,000 barrels per day from Houston to Hearne, Texas. Thepipeline is expected to be completed in mid-2019. Our estimated cost to acquire our 40 percent undivided interest in this pipeline is$170 million. We have incurred capital expenditures of $7 million through December 2017.Sunrise Pipeline SystemEffective January 31, 2018, we entered into a joint ownership agreement with Sunrise Pipeline LLC, a subsidiary of Plains All AmericanPipeline, L.P. (Plains) to acquire a 20 percent undivided interest in the expanded Sunrise Pipeline System to be constructed by Plains.The Sunrise Pipeline System will contain (i) a 262-mile, 24-inch crude oil pipeline (the Sunrise Pipeline) that will originate at Plains’terminal in Midland, Texas and will end at Plains’ station in Wichita Falls, Texas with throughput capacity of 500,000 barrels per day,and (ii) two 270,000 shell barrel capacity tanks located at the Colorado City, Texas station (the Colorado City Storage Tanks). TheSunrise Pipeline System expansion is expected to begin construction in early 2018 and continue through the first half of 2019. The costto acquire our 20 percent undivided interest in the Sunrise Pipeline System is $135 million, of which $34 million was paid onFebruary 1, 2018. Including the February 2018 payment, we expect to incur approximately $101 million during 2018.Environmental MattersWe are involved, together with several other companies, in an environmental cleanup in the Village of Hartford, Illinois (the Village)and during 2015, one of these companies assumed the ongoing remediation in the Village pursuant to a federal court order. We hadpreviously conducted an initial response in the Village, along with other companies, pursuant to an administrative order issued by theU.S. EPA. The parties involved in the initial response may have further claims among themselves for costs already incurred. We alsocontinue to be engaged in site assessment and interim measures at the adjacent shutdown refinery site, which we93Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)acquired as part of an acquisition in 2005, and we are in litigation with other potentially responsible parties and the Illinois EPA relatingto the remediation of the site. In each of these matters, we have various defenses, limitations, and potential rights for contribution fromthe other responsible parties. We have recorded a liability for our expected contribution obligations. However, because of theunpredictable nature of these cleanups, the methodology for allocation of liabilities, and the State of Illinois’ failure to directly sue thirdparties responsible for historic contamination at the site, it is reasonably possible that we could incur a loss in a range of $0 to$200 million in excess of the amount of our accrual to ultimately resolve these matters. Factors underlying this estimated range areexpected to change from time to time, and actual results may vary significantly from this estimate.Litigation MattersWe are party to claims and legal proceedings arising in the ordinary course of business. We have not recorded a loss contingencyliability with respect to some of these matters because we have determined that it is remote that a loss has been incurred. For othermatters, we have recorded a loss contingency liability where we have determined that it is probable that a loss has been incurred andthat the loss is reasonably estimable. These loss contingency liabilities are not material to our financial position. We re-evaluate andupdate our loss contingency liabilities as matters progress over time, and we believe that any changes to the recorded liabilities will notbe material to our financial position, results of operations, or liquidity.Self-InsuranceWe are self-insured for certain medical and dental, workers’ compensation, automobile liability, general liability, and property liabilityclaims up to applicable retention limits. Liabilities are accrued for self-insured claims, or when estimated losses exceed coverage limits,and when sufficient information is available to reasonably estimate the amount of the loss. These liabilities are included in accruedexpenses and other long-term liabilities.94Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)10.EQUITYShare ActivityActivity in the number of shares of common stock and treasury stock was as follows (in millions): CommonStock TreasuryStockBalance as of December 31, 2014673 (159)Transactions in connection withstock-based compensation plans— 1Stock purchases under purchase program— (42)Balance as of December 31, 2015673 (200)Transactions in connection withstock-based compensation plans— 1Stock purchases under purchase program— (23)Balance as of December 31, 2016673 (222)Transactions in connection withstock-based compensation plans— 1Stock purchases under purchase program— (19)Balance as of December 31, 2017673 (240)Preferred StockWe have 20 million shares of preferred stock authorized with a par value of $0.01 per share. No shares of preferred stock wereoutstanding as of December 31, 2017 or 2016.Treasury StockWe purchase shares of our common stock as authorized under our common stock purchase program (described below) and to meet ourobligations under employee stock-based compensation plans.On February 28, 2008, our board of directors approved a $3 billion common stock purchase program with no expiration date, and wecompleted that program during 2015. On July 13, 2015, our board of directors authorized us to purchase an additional $2.5 billion ofour outstanding common stock (the 2015 program) with no expiration date, and we completed that program during 2017. OnSeptember 21, 2016, our board of directors authorized our purchase of up to an additional $2.5 billion (the 2016 program) with noexpiration date. During the years ended December 31, 2017, 2016, and 2015, we purchased $1.3 billion, $1.3 billion, and $2.7 billion,respectively, of our common stock under our programs. As of December 31, 2017, we have approvals under the 2016 program topurchase approximately $1.2 billion of our common stock.On January 23, 2018, our board of directors authorized our purchase of up to an additional $2.5 billion of our outstanding commonstock with no expiration date.Common Stock DividendsOn January 23, 2018, our board of directors declared a quarterly cash dividend of $0.80 per common share payable on March 6, 2018to holders of record at the close of business on February 13, 2018.95Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Valero Energy Partners LP UnitsOn September 16, 2016, VLP entered into an equity distribution agreement pursuant to which VLP may offer and sell from time to timetheir common units having an aggregate offering price of up to $350 million based on amounts, at prices, and on terms to bedetermined by market conditions and other factors at the time of the offerings (such continuous offering program, or at-the-marketprogram, referred to as the “ATM Program”). VLP issued 742,897 and 223,083 common units under the ATM Program and receivednet proceeds of $35 million and $9 million after deducting offering costs during the years ended December 31, 2017 and 2016,respectively.Effective November 24, 2015, VLP completed a public offering of 4,250,000 common units at a price of $46.25 per unit and receivednet proceeds from the offering of $189 million after deducting the underwriting discount and other offering costs.Income Tax Effects Related to Components of Other Comprehensive Income (Loss)The tax effects allocated to each component of other comprehensive income (loss) were as follows (in millions): Before-TaxAmount Tax Expense(Benefit) Net AmountYear Ended December 31, 2017: Foreign currency translation adjustment$514 $— $514Pension and other postretirement benefits: Loss arising during the year related to: Net actuarial loss(79) (29) (50)Prior service cost(4) (1) (3)Miscellaneous loss— 3 (3)Amounts reclassified into income related to: Net actuarial loss50 18 32Prior service credit(36) (13) (23)Curtailment and settlement loss4 1 3Net loss on pension and otherpostretirement benefits(65) (21) (44)Other comprehensive income$449 $(21) $47096Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Before-TaxAmount Tax Expense(Benefit) Net AmountYear Ended December 31, 2016: Foreign currency translation adjustment$(415) $— $(415)Pension and other postretirement benefits: Gain (loss) arising during the year related to: Net actuarial loss(110) (34) (76)Miscellaneous gain— (8) 8Amounts reclassified into income related to: Net actuarial loss48 18 30Prior service credit(36) (13) (23)Net loss on pension and otherpostretirement benefits(98) (37) (61)Other comprehensive loss$(513) $(37) $(476)Year Ended December 31, 2015: Foreign currency translation adjustment$(606) $— $(606)Pension and other postretirement benefits: Gain (loss) arising during the year related to: Net actuarial gain50 15 35Prior service cost(22) (8) (14)Amounts reclassified into income related to: Net actuarial loss62 22 40Prior service credit(40) (14) (26)Curtailment and settlement loss7 2 5Net gain on pension and otherpostretirement benefits57 17 40Other comprehensive loss$(549) $17 $(566)97Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Accumulated Other Comprehensive Income (Loss)Changes in accumulated other comprehensive income (loss) by component, net of tax, were as follows (in millions): ForeignCurrencyTranslationAdjustment DefinedBenefitPlanItems TotalBalance as of December 31, 2014$1 $(368) $(367)Other comprehensive income (loss)before reclassifications(606) 21 (585)Amounts reclassified fromaccumulated other comprehensive income (loss)— 19 19Net other comprehensive income (loss)(606) 40 (566)Balance as of December 31, 2015(605) (328) (933)Other comprehensive lossbefore reclassifications(416) (68) (484)Amounts reclassified fromaccumulated other comprehensiveloss— 7 7Net other comprehensive loss(416) (61) (477)Balance as of December 31, 2016(1,021) (389) (1,410)Other comprehensive income (loss)before reclassifications514 (56) 458Amounts reclassified fromaccumulated other comprehensive loss— 12 12Net other comprehensive income (loss)514 (44) 470Balance as of December 31, 2017$(507) $(433) $(940)98Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Gains (losses) reclassified out of accumulated other comprehensive loss and into net income were as follows (in millions):Details aboutAccumulated OtherComprehensive LossComponents Affected LineItem in theStatement ofIncome Year Ended December 31, 2017 2016 2015 Amortization of items related todefined benefit pension plans: Net actuarial loss $(50) $(48) $(62) (a)Prior service credit 36 36 40 (a)Curtailment and settlement (4) — (7) (a) (18) (12) (29) Total before tax 6 5 10 Tax benefitTotal reclassifications for the year $(12) $(7) $(19) Net of tax_________________________(a)These accumulated other comprehensive loss components are included in the computation of net periodic benefit cost, as further discussed inNote 12. Net periodic benefit cost is reflected in operating expenses (excluding depreciation and amortization expense) and general andadministrative expenses (excluding depreciation and amortization expense).11.VARIABLE INTEREST ENTITIESConsolidated VIEsIn the normal course of business, we have financial interests in certain entities that have been determined to be VIEs. We consolidate aVIE when we have a variable interest in an entity for which we are the primary beneficiary such that we have (a) the power to direct theactivities of the VIE that most significantly impact the VIE’s economic performance and (b) the obligation to absorb losses of or theright to receive benefits from the VIE that could potentially be significant to the VIE. In order to make this determination, we evaluatedour contractual arrangements with the VIEs, including arrangements for the use of assets, purchases of products and services, debt,equity, or management of operating activities.The following discussion summarizes our involvement with our VIEs:•VLP is a publicly traded master limited partnership whose common limited partner units are traded on the New York StockExchange under “VLP.” We formed VLP in July 2013 to own, operate, develop, and acquire crude oil and refined petroleumproducts pipelines, terminals, and other transportation and logistics assets. VLP’s assets include crude oil and refined petroleumproducts pipeline and terminal systems in the U.S. Gulf Coast and U.S. Mid-Continent regions that are integral to the operationsof ten of our refineries. As of December 31, 2017, we owned a 66.2 percent limited partner interest and a 2.0 percent generalpartner interest in VLP, and public unitholders owned a 31.8 percent limited partner interest.We determined VLP is a VIE because the public limited partners of VLP (i.e., parties other than entities under common controlwith the general partner) lack the power to direct the activities of VLP that most significantly impact its economic performancebecause they do not have substantive99Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)kick-out rights over the general partner or substantive participating rights in VLP. Furthermore, we determined that we are theprimary beneficiary of VLP because (a) we are the single decision maker and because our general partner interest provides uswith the sole power to direct the activities that most significantly impact VLP’s economic performance and (b) our 66.2 percentlimited partner interest and 2.0 percent general partner interest provide us with significant economic rights and obligations.Substantially all of VLP’s revenues are derived from us; therefore, there is limited risk to us associated with VLP’s operations.•Diamond Green Diesel Holdings LLC (DGD) is a joint venture with Darling Green Energy LLC, a subsidiary of DarlingIngredients Inc., that was formed to construct and operate a biodiesel plant that processes animal fats, used cooking oils, andother vegetable oils into renewable green diesel. The plant is located next to our St. Charles Refinery and began operations inJune 2013. Our significant agreements with DGD include an operations agreement that outlines our responsibilities as operatorof the plant, a debt agreement whereby we financed approximately 60 percent of the construction costs of the plant, and amarketing agreement.As operator, we operate the plant and perform certain day-to-day operating and management functions for DGD as anindependent contractor. The operations agreement provides us (as operator) and, in the event of certain conditions, the debtagreement provides us (as lender) with certain power to direct the activities that most significantly impact DGD’s economicperformance. Because the operations agreement and the debt agreement convey such power to us and are separate from ourownership rights, DGD was determined to be a VIE. For this reason and because we hold a 50 percent ownership interest thatprovides us with significant economic rights and obligations, we determined that we are the primary beneficiary of DGD. DGDhas risk associated with its operations because it generates revenues from third-party customers.•We have terminaling agreements with three subsidiaries of Infraestructura Energetica Nova, S.A.B. de C.V. (IEnova), a Mexicansubsidiary of Sempra Energy, a U.S. public company (the three subsidiaries are collectively referred to as VPM Terminals). Theterminaling agreements represent variable interests because we have determined them to be capital leases due to our exclusiveuse of the terminals. Although we do not have an ownership interest in the entities that own each of the three terminals, thecapital leases convey to us (i) the power to direct the activities that most significantly impact the economic performance of allthree terminals and (ii) the ability to influence the benefits received or the losses incurred by the terminals because of our use ofthe terminals. As a result, we determined each of the entities was a VIE and that we are the primary beneficiary of each.Substantially all of VPM Terminals’ revenues will be derived from us; therefore, there is limited risk to us associated with VPMTerminals’ operations.•We also have financial interests in other entities that have been determined to be VIEs because the entities’ contractualarrangements transfer the power to direct the activities that most significantly impact their economic performance or reduce theexposure to operational variability and risk of loss created by the entity that otherwise would be held exclusively by the equityowners. Furthermore, we determined that we are the primary beneficiary of these VIEs because (a) certain contractualarrangements (exclusive of our ownership rights) provide us with the power to direct the activities that most significantly impactthe economic performance of these entities and/or (b) our 50 percent100Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)ownership interests provide us with significant economic rights and obligations. The financial position, results of operations,and cash flows of these VIEs are not material to us.The VIEs’ assets can only be used to settle their own obligations and the VIEs’ creditors have no recourse to our assets. We do notprovide financial guarantees to our VIEs. Although we have provided credit facilities to some of our VIEs in support of theirconstruction or acquisition activities, these transactions are eliminated in consolidation. Our financial position, results of operations, andcash flows are impacted by our consolidated VIEs’ performance, net of intercompany eliminations, to the extent of our ownershipinterest in each VIE.The following tables present summarized balance sheet information for the significant assets and liabilities of our VIEs, which areincluded in our balance sheets (in millions). December 31, 2017 VLP DGD VPM Terminals Other TotalAssets Cash and temporary cash investments$42 $123 $1 $13 $179Other current assets2 66 4 — 72Property, plant, and equipment, net1,416 435 51 127 2,029Liabilities Current liabilities$27 $33 $26 $9 $95Debt and capital lease obligations,less current portion905 — — 43 948 December 31, 2016 VLP DGD Other TotalAssets Cash and temporary cash investments$71 $167 $15 $253Other current assets3 87 — 90Property, plant, and equipment, net865 355 133 1,353Liabilities Current liabilities$15 $17 $7 $39Debt and capital lease obligations,less current portion525 — 46 571Non-Consolidated VIEsWe 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 equityinvestments. However, one of our non-consolidated VIEs is accounted for under owner accounting and is further described below andin Note 9.101Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)As described in Note 9, we have a 50 percent membership interest in MVP, which was formed to construct, own, and operate the MVPTerminal. We determined MVP is a VIE because the power to direct the activities that most significantly impact its economicperformance is not required to be held by its two members, but is held by Magellan, as operator under a construction, operating, andmanagement agreement with MVP. For this reason and because Magellan holds a 50 percent interest in MVP that provides it withsignificant economic rights and obligations, we determined that we are not the primary beneficiary. As of December 31, 2017, ourmaximum exposure to loss was $80 million, which represents our equity investment in MVP.12.EMPLOYEE BENEFIT PLANSDefined Benefit PlansWe have defined benefit pension plans, some of which are subject to collective bargaining agreements, that cover most of ouremployees. These plans provide eligible employees with retirement income based primarily on years of service and compensationduring specific periods under final average pay and cash balance formulas. We fund our pension plans as required by local regulations.In the U.S., all qualified pension plans are subject to the Employee Retirement Income Security Act minimum funding standard. Wetypically do not fund or fully fund U.S. nonqualified and certain international pension plans that are not subject to funding requirementsbecause contributions to these pension plans may be less economic and investment returns may be less attractive than our otherinvestment alternatives.We also provide health care and life insurance benefits for certain retired employees through our postretirement benefit plans. Most ofour employees become eligible for these benefits if, while still working for us, they reach normal retirement age or take early retirement.These plans are unfunded, and retired employees share the cost with us. Individuals who became our employees as a result of anacquisition became eligible for other postretirement benefits under our plans as determined by the terms of the relevant acquisitionagreement.102Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)The changes in benefit obligation related to all of our defined benefit plans, the changes in fair value of plan assets(a), and the fundedstatus of our defined benefit plans as of and for the years ended were as follows (in millions): Pension Plans Other PostretirementBenefit Plans December 31, December 31, 2017 2016 2017 2016Changes in benefit obligation: Benefit obligation as of beginning of year$2,567 $2,365 $302 $336Service cost123 111 6 7Interest cost86 84 10 12Participant contributions— — 9 8Benefits paid(158) (130) (28) (27)Actuarial (gain) loss286 171 6 (35)Other22 (34) 1 1Benefit obligation as of end of year$2,926 $2,567 $306 $302 Changes in plan assets (a): Fair value of plan assets as of beginning of year$2,097 $1,947 $— $—Actual return on plan assets363 165 — —Valero contributions110 141 19 18Participant contributions— — 9 8Benefits paid(158) (130) (28) (27)Other16 (26) — 1Fair value of plan assets as of end of year$2,428 $2,097 $— $— Reconciliation of funded status (a): Fair value of plan assets as of end of year$2,428 $2,097 $— $—Less benefit obligation as of end of year2,926 2,567 306 302Funded status as of end of year$(498) $(470) $(306) $(302) Accumulated benefit obligation$2,746 $2,419 n/a n/a___________________________ (a)Plan assets include only the assets associated with pension plans subject to legal minimum funding standards. Plan assets associated with U.S. nonqualified pension plans arenot included here because they are not protected from our creditors and therefore cannot be reflected as a reduction from our obligations under the pension plans. As a result,the reconciliation of funded status does not reflect the effect of plan assets that exist for all of our defined benefit plans. See Note 18 for the assets associated with certain U.S.nonqualified pension plans.103Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Amounts recognized in our balance sheet for our pension and other postretirement benefits plans include (in millions): Pension Plans Other PostretirementBenefit Plans December 31, December 31, 2017 2016 2017 2016Deferred charges and other assets, net$5 $2 $— $—Accrued expenses(14) (13) (19) (19)Other long-term liabilities(489) (459) (287) (283) $(498) $(470) $(306) $(302)The accumulated benefit obligations for certain of our pension plans exceed the fair values of the assets of those plans. For those plans,the following table presents the total projected benefit obligation, accumulated benefit obligation, and fair value of the plan assets(in millions). December 31, 2017 2016Projected benefit obligation$2,661 $2,322Accumulated benefit obligation2,526 2,210Fair value of plan assets2,180 1,870Benefit payments that we expect to pay, including amounts related to expected future services that we expect to receive, are as followsfor the years ending December 31 (in millions): PensionBenefits OtherPostretirementBenefits2018$162 $192019219 192020184 192021180 192022185 192023-20271,074 93We plan to contribute approximately $131 million to our pension plans, including discretionary contributions of $100 million, and$19 million to our other postretirement benefit plans during 2018.104Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)The components of net periodic benefit cost (credit) related to our defined benefit plans were as follows (in millions): Pension Plans Other PostretirementBenefit Plans Year Ended December 31, Year Ended December 31, 2017 20162015 2017 2016 2015Service cost$123 $111 $109 $6 $7 $8Interest cost86 84 98 10 12 14Expected return on plan assets(150) (139) (133) — — —Amortization of: Net actuarial (gain) loss53 49 62 (3) (1) —Prior service credit(20) (20) (22) (16) (16) (18)Special charges (credits)4 (7) 7 — — —Net periodic benefit cost (credit)$96 $78 $121 $(3) $2 $4Amortization of prior service credit shown in the preceding table was based on a straight-line amortization of the cost over the averageremaining service period of employees expected to receive benefits under each respective plan. Amortization of the net actuarial (gain)loss shown in the preceding table was based on the straight-line amortization of the excess of the unrecognized (gain) loss over10 percent of the greater of the projected benefit obligation or market-related value of plan assets (smoothed asset value) over theaverage remaining service period of active employees expected to receive benefits under each respective plan.Pre-tax amounts recognized in other comprehensive income (loss) were as follows (in millions): Pension Plans Other PostretirementBenefit Plans Year Ended December 31, Year Ended December 31, 2017 2016 2015 2017 2016 2015Net gain (loss) arising duringthe year: Net actuarial gain (loss)$(73) $(145) $24 $(6) $35 $26Prior service cost(4) — (22) — — —Net (gain) loss reclassified intoincome: Net actuarial (gain) loss53 49 62 (3) (1) —Prior service credit(20) (20) (22) (16) (16) (18)Curtailment and settlement loss4 — 7 — — —Total changes in othercomprehensive income (loss)$(40) $(116) $49 $(25) $18 $8105Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)The pre-tax amounts in accumulated other comprehensive loss that have not yet been recognized as components of net periodic benefitcost (credit) were as follows (in millions): Pension Plans Other PostretirementBenefit Plans December 31, December 31, 20172016 2017 2016Net actuarial (gain) loss$894 $878 $(57) $(66)Prior service credit(121) (145) (42) (58)Total$773 $733 $(99) $(124)The following pre-tax amounts included in accumulated other comprehensive loss as of December 31, 2017 are expected to berecognized as components of net periodic benefit cost (credit) during the year ending December 31, 2018 (in millions): Pension Plans OtherPostretirementBenefit PlansAmortization of net actuarial (gain) loss$66 $(2)Amortization of prior service credit(19) (11)Total$47 $(13)The weighted-average assumptions used to determine the benefit obligations were as follows: Pension Plans OtherPostretirementBenefit Plans December 31, December 31, 2017 2016 2017 2016Discount rate3.58% 4.08% 3.72% 4.26%Rate of compensation increase3.86% 3.81% n/a n/aThe discount rate assumption used to determine the benefit obligations as of December 31, 2017 and 2016 for the majority of ourpension plans and other postretirement benefit plans was based on the Aon Hewitt AA Only Above Median yield curve and consideredthe timing of the projected cash outflows under our plans. This curve was designed by Aon Hewitt to provide a means for plan sponsorsto value the liabilities of their pension plans or postretirement benefit plans. It is a hypothetical double-A yield curve represented by aseries of annualized individual discount rates with maturities from one-half year to 99 years. Each bond issue underlying the curve isrequired to have an average rating of double-A when averaging all available ratings by Moody’s Investor Services, Standard and Poor’sRatings Service, and Fitch Ratings. Only the bonds representing the 50 percent highest yielding issuances among those with averageratings of double-A are included in this yield curve.106Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)We based our discount rate assumption on the Aon Hewitt AA Only Above Median yield curve because we believe it is representativeof the types of bonds we would use to settle our pension and other postretirement benefit plan liabilities as of those dates. We believethat the yields associated with the bonds used to develop this yield curve reflect the current level of interest rates.The weighted-average assumptions used to determine the net periodic benefit cost were as follows: Pension Plans Other PostretirementBenefit Plans Year Ended December 31, Year Ended December 31, 2017 2016 2015 2017 2016 2015Discount rate4.08% 4.45% 4.10% 4.26% 4.53% 4.13%Expected long-term rate of returnon plan assets7.29% 7.28% 7.29% n/a n/a n/aRate of compensation increase3.81% 3.79% 3.78% n/a n/a n/aThe assumed health care cost trend rates were as follows: December 31, 2017 2016Health care cost trend rate assumed for the next year7.30% 7.28%Rate to which the cost trend rate was assumed to decline(the ultimate trend rate)5.00% 5.00%Year that the rate reaches the ultimate trend rate2026 2026Assumed health care cost trend rates impact the amounts reported for retiree health care plans. A one percentage-point increase ordecrease in assumed health care cost trend rates would have an immaterial effect on the total of service and interest cost componentsand on the accumulated postretirement benefit obligation on our postretirement benefits.107Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)The following tables present the fair values of the assets of our pension plans (in millions) as of December 31, 2017 and 2016 by levelof the fair value hierarchy. Assets categorized in Level 1 of the hierarchy are measured at fair value using a market approach based onquotations from national securities exchanges. Assets categorized in Level 2 of the hierarchy are measured at net asset value in a marketthat is not active. As previously noted, we do not fund or fully fund U.S. nonqualified and certain international pension plans that arenot subject to funding requirements, and we do not fund our other postretirement benefit plans. Fair Value Measurements Using Total as ofDecember 31,2017 Level 1 Level 2 Level 3 Equity securities: U.S. companies (a)$571 $— $— $571International companies187 1 — 188Preferred stock4 — — 4Mutual funds: International growth118 — — 118Index funds (b)85 — — 85Corporate debt instruments— 272 — 272Government securities: U.S. Treasury securities45 — — 45Other government securities— 144 — 144Common collective trusts (c)— 621 — 621Pooled separate accounts— 192 — 192Private funds— 101 — 101Insurance contract— 18 — 18Interest and dividends receivable5 — — 5Cash and cash equivalents85 1 — 86Securities transactions payable, net(22) — — (22)Total pension assets$1,078 $1,350 $— $2,428___________________________ See notes on page 109.108Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Fair Value Measurements Using Total as ofDecember 31,2016 Level 1 Level 2 Level 3 Equity securities: U.S. companies (a)$562 $— $— $562International companies164 — — 164Preferred stock3 — — 3Mutual funds: International growth90 — — 90Index funds (b)230 — — 230Corporate debt instruments— 280 — 280Government securities: U.S. Treasury securities52 — — 52Other government securities— 158 — 158Common collective trusts (c)— 434 — 434Private funds— 76 — 76Insurance contract— 18 — 18Interest and dividends receivable5 — — 5Cash and cash equivalents56 16 — 72Securities transactions payable, net(47) — — (47)Total pension assets$1,115 $982 $— $2,097__________________________________ (a)Equity securities are held in a wide range of industrial sectors, including consumer goods, information technology, healthcare, industrials, and financialservices.(b)This class includes primarily investments in approximately 70 percent equities and 30 percent bonds as of December 31, 2017. As of December 31,2016, the class included primarily investments in approximately 50 percent equities and 50 percent bonds.(c)This class includes primarily investments in approximately 80 percent equities and 20 percent bonds as of December 31, 2017. As of December 31,2016, the class included primarily investments in approximately 90 percent equities and 10 percent bonds.The investment policies and strategies for the assets of our pension plans incorporate a well-diversified approach that is expected toearn long-term returns from capital appreciation and a growing stream of current income. This approach recognizes that assets areexposed to risk and the market value of the pension plans’ assets may fluctuate from year to year. Risk tolerance is determined basedon our financial ability to withstand risk within the investment program and the willingness to accept return volatility. In line with theinvestment return objective and risk parameters, the pension plans’ mix of assets includes a diversified portfolio of equity and fixed-income investments. Equity securities include international stocks and a blend of U.S. growth and value stocks of various sizes ofcapitalization. Fixed income securities include bonds and notes issued by the U.S. government and its agencies, corporate bonds, andmortgage-backed securities. The aggregate asset allocation is reviewed on an annual basis. As of December 31, 2017, the targetallocations for plan assets under our primary pension plan are 70 percent equity securities and 30 percent fixed income investments.109Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)The expected long-term rate of return on plan assets is based on a forward-looking expected asset return model. This model derives anexpected rate of return based on the target asset allocation of a plan’s assets. The underlying assumptions regarding expected rates ofreturn for each asset class reflect Aon Hewitt’s best expectations for these asset classes. The model reflects the positive effect ofperiodic rebalancing among diversified asset classes. We select an expected asset return that is supported by this model.Defined Contribution PlansWe have defined contribution plans that cover most of our employees. Our contributions to these plans are based on employees’compensation and/or a partial match of employee contributions to the plans. Our contributions to these defined contribution plans were$70 million, $67 million, and $65 million for the years ended December 31, 2017, 2016, and 2015, respectively.13.STOCK-BASED COMPENSATIONOverviewUnder our 2011 Omnibus Stock Incentive Plan (the OSIP), various stock and stock-based awards may be granted to employees andnon-employee directors. Awards available under the OSIP include options to purchase shares of common stock, performance awardsthat vest upon the achievement of an objective performance goal, stock appreciation rights, restricted stock that vests over a perioddetermined by our compensation committee, and dividend equivalent rights (DERs). The OSIP was approved by our stockholders onApril 28, 2011 and re-approved by our stockholders on May 12, 2016. As of December 31, 2017, 9,409,188 shares of our commonstock remained available to be awarded under the OSIP.We also maintain other stock-based compensation plans under which previously granted equity awards remain outstanding.No additional grants may be awarded under these plans.The following table reflects activity related to our stock-based compensation arrangements (in millions): Year Ended December 31, 2017 2016 2015Stock-based compensation expense: Restricted stock$58 $52 $47Performance awards19 15 11Stock options— 1 1Total stock-based compensation expense$77 $68 $59Tax benefit recognized on stock-based compensation expense$27 $24 $21Tax benefit realized for tax deductions resulting fromexercises and vestings44 33 66Effect of tax deductions in excess of recognizedstock-based compensation expense (a)24 22 44_______________________________(a)Effective January 1, 2016, the effect of tax deductions in excess of recognized stock-based compensation expense is reported as an operating cash flow.These amounts were previously reported as financing cash flows.Our significant stock-based compensation arrangement is discussed below.110Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Restricted StockRestricted stock is granted to employees and non-employee directors. Restricted stock granted to employees vests in accordance withindividual written agreements between the participants and us, usually in equal annual installments over a period of three yearsbeginning one year after the date of grant. Restricted stock granted to our non-employee directors vests in equal annual installmentsover a period of three years beginning one year after the date of grant. The fair value of each restricted stock per share is equal to themarket price of our common stock. A summary of the status of our restricted stock awards is presented in the following table.Number ofShares Weighted-AverageGrant-DateFair ValuePer ShareNonvested shares as of January 1, 20171,566,950 $60.68Granted739,393 79.32Vested(897,246) 61.76Forfeited(8,057) 61.22Nonvested shares as of December 31, 20171,401,040 69.82As of December 31, 2017, there was $61 million of unrecognized compensation cost related to outstanding unvested restricted stockawards, which is expected to be recognized over a weighted-average period of approximately two years.The following table reflects activity related to our restricted stock (in millions, except per share data): Year Ended December 31, 2017 2016 2015Weighted-average grant-date fair value per share ofrestricted stock granted$79.32 $59.00 $70.07Fair value of restricted stock vested71 46 69111Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)14.INCOME TAXESTax ReformOn December 22, 2017, Tax Reform was enacted, which resulted in significant changes to the U.S. Internal Revenue Code of 1986, asamended (the Code) and was effective beginning on January 1, 2018. The most significant changes affecting us are as follows:•reduction in the statutory income tax rate from 35 percent to 21 percent;•repeal of the manufacturing deduction;•deduction for all of the costs to acquire or construct certain business assets in the year they are placed in service through 2022;•shift from a worldwide system of taxation to a territorial system of taxation, resulting in a minimum tax on the income ofinternational subsidiaries (the global intangible low-taxes income (GILTI) tax) rather than a tax deferral on such earnings incertain circumstances; and•assessment of a one-time transition tax on deemed repatriated earnings and profits from our international subsidiaries.We reflected an overall income tax benefit of $1.9 billion for the year ended December 31, 2017 with respect to Tax Reform as a resultof the following:•We remeasured our U.S. deferred tax assets and liabilities using the 21 percent rate, which resulted in a tax benefit and areduction to our net deferred tax liabilities of $2.6 billion.•We recognized a one-time transition tax of $734 million on the deemed repatriation of previously undistributed accumulatedearnings and profits of our international subsidiaries based on approximately $4.7 billion of the combined earnings and profitsof our international subsidiaries that have not been distributed to us. This transition tax will be remitted to the Internal RevenueService (IRS) over the eight-year period provided in the Code beginning in 2018.•We accrued withholding tax of $47 million on a portion of the cash held by one of our international subsidiaries that we havedeemed to not be permanently reinvested in our operations in that country.Because of the significant and complex changes to the Code from Tax Reform, including the need for regulatory guidance from the IRSto properly account for many of the provisions, the SEC issued Staff Accounting Bulletin No. 118, “Income Tax AccountingImplications of the Tax Cuts and Jobs Act,” (SAB 118) to provide for a measurement period of up to one year for adjustments to bemade to account for the effects of Tax Reform. Specifically, SAB 118 requires that the effects of Tax Reform be recorded for itemswhere 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 tobe accounted for under the Code prior to changes from Tax Reform until a reasonable estimate can be made.112Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)See “Details of the Tax Reform Adjustment” below, which more fully describes the components of our $1.9 billion adjustment,including the components for which we recorded a provisional amount and the components that are incomplete.Income Statement ComponentsIncome before income tax expense (benefit) was as follows (in millions): Year Ended December 31, 2017 2016 2015U.S. operations$2,283 $1,733 $5,327International operations924 1,449 644Income before income tax expense (benefit)$3,207 $3,182 $5,971Statutory income tax rates applicable to the countries in which we operate were as follows: Year Ended December 31, 2017 2016 2015U.S. (a)35% 35% 35%Canada15% 15% 15%U.K.19% 20% 20%Ireland13% 13% 13%Aruba (b)n/a 7% 7%___________________________ (a)Statutory income tax rate was reduced to 21 percent effective January 1, 2018 as described in “Tax Reform” above.(b)Statutory income tax rate applicable through the date of the Aruba Disposition as described in Note 2.113Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)The following is a reconciliation of income tax expense (benefit) computed by applying statutory income tax rates as reflected in thepreceding table to actual income tax expense (benefit) related to our operations (in millions): Year Ended December 31, 2017 U.S. International Total Amount Percent Amount Percent Amount PercentIncome tax expense at statutory rates$799 35.0 % $158 17.1% $957 29.8 %U.S. state and Canadian provincialtax expense, net of federalincome tax effect37 1.6 % 46 5.0% 83 2.6 %Permanent differences: Manufacturing deduction(42) (1.8)% — — (42) (1.3)%Other(9) (0.4)% — — (9) (0.3)%Change in tax law(1,862) (81.6)% — — (1,862) (58.1)%Tax effects of income associatedwith noncontrolling interests(31) (1.4)% — — (31) (1.0)%Other, net(52) (2.3)% 7 0.8% (45) (1.4)%Income tax expense (benefit)$(1,160) (50.9)% $211 22.9% $(949) (29.7)% Year Ended December 31, 2016 U.S. International Total Amount Percent Amount Percent Amount PercentIncome tax expense at statutory rates$606 35.0 % $256 17.7 % $862 27.1 %U.S. state and Canadian provincialtax expense, net of federalincome tax effect5 0.3 % 31 2.1 % 36 1.1 %Permanent differences: Manufacturing deduction(22) (1.3)% — — (22) (0.7)%Other(3) (0.2)% (10) (0.7)% (13) (0.4)%Change in tax law— — (7) (0.5)% (7) (0.2)%Tax effects of income associatedwith noncontrolling interests(44) (2.5)% — — (44) (1.4)%Other, net(37) (2.1)% (10) (0.7)% (47) (1.5)%Income tax expense$505 29.2 % $260 17.9 % $765 24.0 %114Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Year Ended December 31, 2015 U.S. International Total Amount Percent Amount Percent Amount PercentIncome tax expense at statutory rates$1,864 35.0 % $92 14.3 % $1,956 32.8 %U.S. state and Canadian provincialtax expense, net of federalincome tax effect45 0.8 % 73 11.3 % 118 2.0 %Permanent differences: Manufacturing deduction(102) (1.9)% — — (102) (1.7)%Other(18) (0.3)% (5) (0.8)% (23) (0.4)%Change in tax law— — (17) (2.6)% (17) (0.3)%Tax effects of income associatedwith noncontrolling interests(39) (0.7)% — — (39) (0.7)%Other, net(25) (0.5)% 2 0.3 % (23) (0.4)%Income tax expense$1,725 32.4 % $145 22.5 % $1,870 31.3 %Components of income tax expense (benefit) related to our operations were as follows (in millions): Year Ended December 31, 2017 U.S. International TotalCurrent: Country$1,305 $194 $1,499U.S. state / Canadian provincial34 61 95Total current1,339(a)255 1,594Deferred: Country(2,522) (29) (2,551)U.S. state / Canadian provincial23 (15) 8Total deferred(2,499)(b)(44) (2,543)Income tax expense (benefit)$(1,160) $211 $(949)___________________________ See notes on page 116.115Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Year Ended December 31, 2016 U.S. International TotalCurrent: Country$294 $194 $488U.S. state / Canadian provincial12 35 47Total current306 229 535Deferred: Country203 35 238U.S. state / Canadian provincial(4) (4) (8)Total deferred199 31 230Income tax expense$505 $260 $765 Year Ended December 31, 2015 U.S. International TotalCurrent: Country$1,513 $64 $1,577U.S. state / Canadian provincial85 43 128Total current1,598 107 1,705Deferred: Country143 8 151U.S. state / Canadian provincial(16) 30 14Total deferred127 38 165Income tax expense$1,725 $145 $1,870___________________________ (a)Current income tax expense includes the effect of our $781 million Tax Reform adjustment as described in “Tax Reform” above.(b)Deferred income tax benefit includes the effect of our $2.6 billion Tax Reform adjustment as described in “Tax Reform” above.Income Taxes PaidIncome taxes paid to U.S. and international taxing authorities were as follows (in millions): Year Ended December 31, 2017 2016 2015U.S.$239 $241 $2,092International171 203 1Income taxes paid, net$410 $444 $2,093116Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Deferred Income Tax Assets and LiabilitiesThe tax effects of significant temporary differences representing deferred income tax assets and liabilities were as follows (in millions): December 31, 2017 2016Deferred income tax assets: Tax credit carryforwards$69 $65Net operating losses (NOLs)492 374Inventories135 93Compensation and employee benefit liabilities179 344Environmental liabilities47 69Other112 100Total deferred income tax assets1,034 1,045Valuation allowance(498) (374)Net deferred income tax assets536 671 Deferred income tax liabilities: Property, plant, and equipment4,545 6,900Deferred turnaround costs272 450Inventories243 356Investments77 253Other107 73Total deferred income tax liabilities5,244 8,032Net deferred income tax liabilities$4,708 $7,361Our deferred income tax assets and liabilities as of December 31, 2017 were impacted by the remeasurement of our U.S. temporarydifferences using the 21 percent statutory income tax rate as more fully described in “Tax Reform” above and “Details of the TaxReform Adjustment” below.We had the following income tax credit and loss carryforwards as of December 31, 2017 (in millions): Amount ExpirationU.S. state income tax credits$76 2018 through 2031U.S. state income tax credits11 UnlimitedU.S. state NOLs (gross amount)9,441 2018 through 2037We have recorded a valuation allowance as of December 31, 2017 and 2016 due to uncertainties related to our ability to utilize some ofour deferred income tax assets, primarily consisting of certain U.S. state income tax credits and NOLs, before they expire. The valuationallowance is based on our estimates of taxable income in the various jurisdictions in which we operate and the period over whichdeferred income tax assets117Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)will be recoverable. During 2017, the valuation allowance increased by $124 million, primarily due to increases in State NOLs. Therealization of net deferred income tax assets recorded as of December 31, 2017 is primarily dependent upon our ability to generatefuture taxable income in certain U.S. states.As described in “Tax Reform” above, one of the most significant changes in Tax Reform is the shift from a worldwide system oftaxation to a territorial system. The shift to a territorial system allows us to distribute cash via a dividend from our internationalsubsidiaries with a full dividend received deduction. As a result, we will not recognize U.S. federal deferred taxes for the future taxconsequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and therespective tax basis for our international subsidiaries. As of December 31, 2017, we recognized a one-time transition tax of$734 million on approximately $4.7 billion of combined earnings and profits of our international subsidiaries. Because of the deemedrepatriation of these accumulated earnings and profits, there are no longer any U.S. federal income tax consequences associated withthe repatriation of any of the $3.2 billion of cash and temporary cash investments held by our international subsidiaries as ofDecember 31, 2017. However, certain countries in which our international subsidiaries are organized impose withholding taxes on cashdistributed outside of those countries. We have accrued for withholding taxes on a portion of the cash held by one of our internationalsubsidiaries that we have deemed to not be permanently reinvested in our operations in that country.Details of the Tax Reform AdjustmentThe following table details the components of our adjustment (in millions) to reflect the effects of Tax Reform for the year endedDecember 31, 2017, including (i) whether such amounts are complete, provisional, or incomplete, and (ii) the additional informationthat we need to obtain in order to complete the accounting as required by SAB 118. See “Tax Reform” above for a discussion of theprovisions of SAB 118. AccountingStatus AmountIncome tax benefit from the remeasurement ofU.S. deferred income tax assets and liabilitiesComplete $(2,643)Tax on the deemed repatriation of the accumulatedearnings and profits of our international subsidiariesProvisional 734Recognition of foreign withholding tax, net of U.S.federal tax benefitComplete 47Deductibility of certain executive compensation expenseIncomplete —Income tax expense associated with the statutory incometax rate differential on accrual to return adjustments thatmay be identified upon completion of our U.S. federalincome tax return in 2018Incomplete —Foreign tax credit available to offset the tax ondeemed repatriation of the accumulated earnings andprofits of our international subsidiariesIncomplete —Estimated Tax Reform benefit $(1,862)We recorded a provisional amount of $734 million for the tax on the deemed repatriation of the accumulated earnings and profits of ourinternational subsidiaries. We continue to gather additional information in order118Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)to more accurately compute this tax. Any associated U.S. state taxes will be recorded once the federal estimate is finalized. Weanticipate this information will be available in the second half of 2018.Our accounting for the following items of Tax Reform are incomplete, and we have not yet been able to make reasonable estimates ofthe effects of these items. Therefore, no provisional amounts were recorded.•Deductibility of certain executive compensation: It is unclear from Tax Reform if the future payments related to existingdeferred compensation plans to the covered executives will be subject to the $1 million deduction limitation or if such plans areconsidered grandfathered. We currently have deferred tax assets related to certain benefit plans that may be determined to besubject to the excess compensation limitations; however, the impact is not expected to be material. Additional clarifyingguidance from the IRS is necessary to determine the proper treatment, and we expect such guidance will be released by the IRSin the near future.•Tax rate differential amount related to accrual to return adjustments: We use estimates to compute certain adjustments relatedto current and deferred income taxes. Upon the filing of our U.S. federal income tax return in the third quarter of 2018,adjustments will be recorded in our financial statements to reflect our actual payment. The U.S. tax rate differential(35 percent for current vs. 21 percent for deferred items) cannot be practically estimated until such true-up adjustmentsare known.•Foreign tax credits on deemed repatriation amount: Additional information is required to determine the amount of availableforeign tax credits, if any, that can be used to reduce our tax on the deemed repatriation of the accumulated earnings and profitsof our international subsidiaries. This includes information needed to compute any foreign tax credit limitations and informationto accurately compute the income taxes paid from our various foreign subsidiaries. We anticipate this information will beavailable in the second half of 2018.Other significant Tax Reform provisions that are not yet effective, but may impact our income tax expense in future years include:•an exemption from U.S. tax on dividends of future foreign earnings;•a limitation on the current deductibility of net interest expense in excess of 30 percent of adjusted taxable income;•a limitation of net operating losses generated after fiscal 2018 to 80 percent of taxable income;•an incremental tax (base erosion anti-abuse tax, or BEAT) on excessive amounts paid to international related parties;•a minimum tax on certain foreign earnings in excess of 10 percent of the international subsidiaries’ tangible assets (the GILTItax); and•a deduction equal to 37.5 percent of our foreign-derived intangible income.119Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)We are still evaluating whether to make a policy election to treat the GILTI tax as a period expense or to provide U.S. deferred taxes ontemporary differences that are expected to generate GILTI income when they reverse in future years.Unrecognized Tax BenefitsThe following is a reconciliation of the change in unrecognized tax benefits, excluding related penalties and interest, (in millions): Year Ended December 31, 2017 2016 2015Balance as of beginning of year$936 $964 $989Additions based on tax positions related to the current year33 36 36Additions for tax positions related to prior years15 11 83Reductions for tax positions related to prior years(42) (46) (82)Reductions for tax positions related to the lapse ofapplicable statute of limitations(1) (3) (3)Settlements— (237) (59)Reclassification of uncertain tax receivable to long-termreceivable from IRS— 211 —Balance as of end of year$941 $936 $964As of December 31, 2017, the balance in unrecognized tax benefits included $274 million of tax refunds that we intend to claim byamending various of our income tax returns for 2010 through 2016. We intend to propose that incentive payments received from theU.S. federal government for blending biofuels into refined petroleum products be excluded from taxable income during these periods.However, due to the complexity of this matter and uncertainties with respect to the interpretation of the Code, we concluded that therefund claims included in the following table cannot be recognized in our financial statements. As a result, these amounts are notincluded in our uncertain tax position liabilities as of December 31, 2017, 2016, and 2015 even though they are reflected in thepreceding table.The following is a reconciliation of unrecognized tax benefits reflected in the preceding table to our uncertain tax position liabilities thatare presented in our balance sheets (in millions). December 31, 2017 2016Unrecognized tax benefits$941 $936Tax refund claim not presented in our balance sheets(274) (433)Other77 (5)Uncertain tax position liabilities presented in our balance sheets$744 $498120Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Amounts recognized in our balance sheets for uncertain tax positions include (in millions): December 31, 2017 2016Income taxes payable$— $(7)Other long-term liabilities(723) (465)Deferred tax liabilities(21) (26)Uncertain tax position liabilities presented in our balance sheets$(744) $(498)As of December 31, 2017 and 2016, there were $793 million and $756 million, respectively, of unrecognized tax benefits that ifrecognized would affect our annual effective tax rate.Penalties and interest during the years ended December 31, 2017, 2016, and 2015 were immaterial. Accrued penalties and interesttotaled $77 million and $70 million as of December 31, 2017 and 2016, respectively, excluding the U.S. federal and state income taxeffects related to interest.During the next 12 months, it is reasonably possible that tax audit resolutions could reduce unrecognized tax benefits, excludinginterest, either because the tax positions are sustained on audit or because we agree to their disallowance. We do not expect thesereductions to have a significant impact on our financial statements because such reductions would not significantly affect our annualeffective tax rate.U.S. Tax Returns Under AuditFederalAs of December 31, 2017, our tax years for 2010 through 2015 were under audit by the IRS. The IRS has proposed adjustments to ourtaxable income for certain open years. We are currently contesting the proposed adjustments with the Office of Appeals of the IRS forcertain open years and do not expect that the ultimate disposition of these adjustments will result in a material change to our financialposition, results of operations, or liquidity. We are continuing to work with the IRS to resolve these matters and we believe that they willbe resolved for amounts consistent with recorded amounts of unrecognized tax benefits associated with these matters.StateAs of December 31, 2017, our tax years for 2004 through 2008 and 2011 through 2014 were under audit by the state of California forcertain tax issues. We do not expect the ultimate disposition of these issues will result in a material change to our financial position,results of operations, or liquidity. We believe these matters will be resolved for amounts consistent with our recorded amounts ofunrecognized tax benefits associated with these matters.121Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)15.EARNINGS PER COMMON SHAREEarnings per common share were computed as follows (dollars and shares in millions, except per share amounts): Year Ended December 31, 2017 2016 2015 ParticipatingSecurities CommonStock ParticipatingSecurities CommonStock ParticipatingSecurities CommonStockEarnings per common share: Net income attributable toValero stockholders $4,065$2,289$3,990Less dividends paid: Common stock 1,238 1,108 845Participating securities 4 3 3Undistributed earnings $2,823 $1,178 $3,142Weighted-average commonshares outstanding2 442 1 461 2 497Earnings per common share: Distributed earnings$2.80 $2.80 $2.40 $2.40 $1.70 $1.70Undistributed earnings6.37 6.37 2.54 2.54 6.30 6.30Total earnings per commonshare$9.17 $9.17 $4.94 $4.94 $8.00 $8.00 Earnings per common share –assuming dilution: Net income attributable toValero stockholders $4,065 $2,289 $3,990Weighted-average commonshares outstanding 442 461 497Common equivalent shares 2 3 3Weighted-average commonshares outstanding –assuming dilution 444 464 500Earnings per common share –assuming dilution $9.16 $4.94 $7.99Participating securities include restricted stock and performance awards granted under our 2011 Omnibus Stock Incentive Plan.122Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)16.SEGMENT INFORMATIONEffective January 1, 2017, we revised our reportable segments to align with certain changes in how our chief operating decision makermanages and allocates resources to our business. Accordingly, we created a new reportable segment — VLP. The results of the VLPsegment, which include the results of our majority-owned master limited partnership referred to by the same name, were transferredfrom the refining segment. Our prior period segment information has been retrospectively adjusted to reflect our current segmentpresentation.As a result, we have three reportable segments as follows:•Refining segment includes our refining operations, the associated marketing activities, and certain logistics assets, which are notowned by VLP, that support our refining operations;•Ethanol segment includes our ethanol operations, the associated marketing activities, and logistics assets that support ourethanol operations; and•VLP segment includes the results of VLP, which provides transportation and terminaling services to our refining segment.Operations that are not included in any of the reportable segments are included in the corporate category.Our reportable segments are strategic business units that offer different products and services. They are managed separately as eachbusiness requires unique technologies and marketing strategies. Performance is evaluated based on segment operating income, whichincludes revenues and expenses that are directly attributable to the management of the respective segment. Intersegment sales aregenerally derived from transactions made at prevailing market rates.123Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)The following table reflects activity related to our reportable segments (in millions): Refining Ethanol VLP CorporateandEliminations TotalYear ended December 31, 2017: Operating revenues: Operating revenues from external customers$90,651 $3,324 $— $5 $93,980Intersegment revenues6 176 452 (634) —Total operating revenues90,657 3,500 452 (629) 93,980Cost of sales: Cost of materials and other80,865 2,804 — (632) 83,037Operating expenses (excluding depreciationand amortization expense reflected below)3,917 443 104 (2) 4,462Depreciation and amortization expense1,800 81 53 — 1,934Total cost of sales86,582 3,328 157 (634) 89,433Other operating expenses58 — 3 — 61General and administrative expenses (excludingdepreciation and amortization expense reflectedbelow)— — — 835 835Depreciation and amortization expense— — — 52 52Operating income by segment$4,017 $172 $292 $(882) $3,599Total expenditures for long-lived assets$1,710 $84 $110 $44 $1,948Year ended December 31, 2016: Operating revenues: Operating revenues from external customers$71,968 $3,691 $— $— $75,659Intersegment revenues— 210 363 (573) —Total operating revenues71,968 3,901 363 (573) 75,659Cost of sales: Cost of materials and other63,405 3,130 — (573) 65,962Operating expenses (excluding depreciationand amortization expense reflected below)3,696 415 96 — 4,207Depreciation and amortization expense1,734 66 46 — 1,846Lower of cost or market inventoryvaluation adjustment(697) (50) — — (747)Total cost of sales68,138 3,561 142 (573) 71,268General and administrative expenses (excludingdepreciation and amortization expense reflectedbelow)— — — 715 715Depreciation and amortization expense— — — 48 48Asset impairment loss56 — — — 56Operating income by segment$3,774 $340 $221 $(763) $3,572Total expenditures for long-lived assets$1,867 $68 $23 $38 $1,996124Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Refining Ethanol VLP CorporateandEliminations TotalYear Ended December 31, 2015: Operating revenues: Operating revenues from external customers$84,521 $3,283 $— $— $87,804Intersegment revenues— 151 244 (395) —Total operating revenues84,521 3,434 244 (395) 87,804Cost of sales: Cost of materials and other71,512 2,744 — (395) 73,861Operating expenses (excluding depreciationand amortization expense reflected below)3,689 448 106 — 4,243Depreciation and amortization expense1,699 50 46 — 1,795Lower of cost or market inventoryvaluation adjustment740 50 — — 790Total cost of sales77,640 3,292 152 (395) 80,689General and administrative expenses (excludingdepreciation and amortization expense reflectedbelow)— — — 710 710Depreciation and amortization expense— — — 47 47Operating income by segment$6,881 $142 $92 $(757) $6,358Total expenditures for long-lived assets$2,216 $67 $38 $29 $2,350Our principal products include conventional and California Air Resources Board gasolines, RBOB (reformulated gasoline blendstockfor oxygenate blending), gasoline blendstocks, ultra-low-sulfur diesel, middle distillates, and jet fuel. Other product revenues primarilyinclude petrochemicals, gas oils, No. 6 fuel oil, petroleum coke, sulfur, and asphalt. Operating revenues from external customers byreportable segment for our principal products were as follows (in millions): Year Ended December 31, 2017 2016 2015Refining: Gasolines and blendstocks$40,362 $33,450 $38,983Distillates42,074 32,576 38,093Other product revenues8,215 5,942 7,445Total refining revenues90,651 71,968 84,521Ethanol: Ethanol2,764 3,105 2,628Distillers grains560 586 655Total ethanol revenues3,324 3,691 3,283Corporate – other revenues5 — —Total revenues from external customers$93,980 $75,659 $87,804125Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Operating revenues by geographic area are shown in the following table (in millions). The geographic area is based on location ofcustomer and no customer accounted for 10 percent or more of our operating revenues. Year Ended December 31, 2017 2016 2015U.S.$66,614 $51,479 $60,319Canada7,039 6,115 6,841U.K. and Ireland11,556 10,797 11,232Other countries8,771 7,268 9,412Total operating revenues$93,980 $75,659 $87,804Long-lived assets include property, plant, and equipment and certain long-lived assets included in “deferred charges and other assets,net.” Long-lived assets by geographic area consisted of the following (in millions): December 31, 2017 2016U.S.$26,083 $25,359Canada1,915 1,816U.K. and Ireland1,063 967Total long-lived assets$29,061 $28,142Total assets by reportable segment were as follows (in millions): December 31, 2017 2016Refining$40,382 $38,095Ethanol1,344 1,316VLP1,517 979Corporate and eliminations6,915 5,783Total assets$50,158 $46,173126Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)17.SUPPLEMENTAL CASH FLOW INFORMATIONIn order to determine net cash provided by operating activities, net income is adjusted by, among other things, changes in current assetsand current liabilities as follows (in millions): Year Ended December 31, 2017 2016 2015Decrease (increase) in current assets: Receivables, net$(870) $(1,531) $1,294Inventories(516) 771 (222)Prepaid expenses and other151 47 (149)Increase (decrease) in current liabilities: Accounts payable1,842 1,556 (1,787)Accrued expenses21 117 (40)Taxes other than income taxes payable172 82 (74)Income taxes payable489 (66) (328)Changes in current assets and current liabilities$1,289 $976 $(1,306)Cash flows related to interest and income taxes were as follows (in millions): Year Ended December 31, 2017 2016 2015Interest paid in excess of amount capitalized$457 $427 $416Income taxes paid, net410 444 2,093Cash flows reflected as “other financing activities, net” for the year ended December 31, 2016 included the payment of a long-termliability of $137 million owed to a joint venture partner associated with an owner-method joint venture investment.Noncash investing and financing activities for the year ended December 31, 2017 included the recognition of (i) a capital lease assetand related obligation associated with an agreement for storage tanks near three of our refineries as described in Note 8 and (ii) terminalassets and related obligation recorded under owner accounting as described in Note 9.There were no significant noncash investing and financing activities for the year ended December 31, 2016.Noncash investing and financing activities for the year ended December 31, 2015 included the recognition of a capital lease asset andrelated obligation associated with an agreement for storage tanks near one of our refineries.127Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)18.FAIR VALUE MEASUREMENTSGeneralU.S. GAAP requires or permits certain assets and liabilities to be measured at fair value on a recurring or nonrecurring basis in ourbalance sheets, and those assets and liabilities are presented below under “Recurring Fair Value Measurements” and “NonrecurringFair Value Measurements.” Assets and liabilities measured at fair value on a recurring basis, such as derivative financial instruments,are measured at fair value at the end of each reporting period. Assets and liabilities measured at fair value on a nonrecurring basis, suchas the impairment of property, plant and equipment, are measured at fair value in particular circumstances.U.S. GAAP also requires the disclosure of the fair values of financial instruments when an option to elect fair value accounting has beenprovided, but such election has not been made. A debt obligation is an example of such a financial instrument. The disclosure of thefair values of financial instruments not recognized at fair value in our balance sheet is presented below under “Other FinancialInstruments.”U.S. GAAP provides a framework for measuring fair value and establishes a three-level fair value hierarchy that prioritizes inputs tovaluation techniques based on the degree to which objective prices in external active markets are available to measure fair value.Following is a description of each of the levels of the fair value hierarchy.•Level 1 - Observable inputs, such as unadjusted quoted prices in active markets for identical assets or liabilities.•Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly orindirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similarassets or liabilities in markets that are not active.•Level 3 - Unobservable inputs for the asset or liability. Unobservable inputs reflect our own assumptions about what marketparticipants would use to price the asset or liability. The inputs are developed based on the best information available in thecircumstances, which might include occasional market quotes or sales of similar instruments or our own financial data such asinternally developed pricing models, discounted cash flow methodologies, as well as instruments for which the fair valuedetermination requires significant judgment.128Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Recurring Fair Value MeasurementsThe following tables present information (in millions) about our assets and liabilities recognized at their fair values in our balance sheetscategorized according to the fair value hierarchy of the inputs utilized by us to determine the fair values as of December 31, 2017 and2016.We have elected to offset the fair value amounts recognized for multiple similar derivative contracts executed with the samecounterparty, including any related cash collateral assets or obligations as shown below; however, fair value amounts by hierarchy levelare presented in the following tables on a gross basis. We have no derivative contracts that are subject to master netting arrangementsthat are reflected gross on the balance sheet. December 31, 2017 TotalGross FairValue Effect ofCounter-partyNetting Effect ofCashCollateralNetting NetCarryingValue onBalanceSheet CashCollateralPaid orReceivedNot Offset Fair Value Hierarchy Level 1 Level 2 Level 3 Assets: Commodity derivativecontracts$875 $19 $— $894 $(893) $— $1 $—Investments of certainbenefit plans65 — 8 73 n/a n/a 73 n/aTotal$940 $19 $8 $967 $(893) $— $74 Liabilities: Commodity derivativecontracts$955 $14 $— $969 $(893) $(76) $— $(102)Environmental creditobligations— 104 — 104 n/a n/a 104 n/aPhysical purchasecontracts— 6 — 6 n/a n/a 6 n/aForeign currencycontracts7 — — 7 n/a n/a 7 n/aTotal$962 $124 $— $1,086 $(893) $(76) $117 129Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2016 TotalGrossFairValue Effect ofCounter-partyNetting Effect ofCashCollateralNetting NetCarryingValue onBalanceSheet CashCollateralPaid orReceivedNot Offset Fair Value Hierarchy Level 1 Level 2 Level 3 Assets: Commodity derivativecontracts$874 $38 $— $912 $(875) $— $37 $—Foreign currencycontracts3 — — 3 n/a n/a 3 n/aInvestments of certainbenefit plans58 — 11 69 n/a n/a 69 n/aTotal$935 $38 $11 $984 $(875) $— $109 Liabilities: Commodity derivativecontracts$872 $23 $— $895 $(875) $(20) $— $(88)Environmental creditobligations— 188 — 188 n/a n/a 188 n/aPhysical purchasecontracts— 5 — 5 n/a n/a 5 n/aTotal$872 $216 $— $1,088 $(875) $(20) $193 A description of our assets and liabilities recognized at fair value along with the valuation methods and inputs we used to develop theirfair value measurements are as follows:•Commodity derivative contracts consist primarily of exchange-traded futures and swaps, and as disclosed in Note 19, some ofthese contracts are designated as hedging instruments. These contracts are measured at fair value using the market approach.Exchange-traded futures are valued based on quoted prices from the exchange and are categorized in Level 1 of the fair valuehierarchy. Swaps are priced using third-party broker quotes, industry pricing services, and exchange-traded curves, withappropriate 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 fairvalue hierarchy.•Physical purchase contracts represent the fair value of fixed-price corn purchase contracts. The fair values of these purchasecontracts are measured using a market approach based on quoted prices from the commodity exchange or an independentpricing 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 ourobligations under certain U.S. nonqualified benefit plans. The assets categorized in Level 1 of the fair value hierarchy aremeasured at fair value using a market approach based on quoted prices from national securities exchanges. The assetscategorized in Level 3 of the fair value hierarchy represent insurance contracts, the fair value of which is provided by theinsurer.130Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)•Foreign currency contracts consist of foreign currency exchange and purchase contracts entered into for our internationaloperations to manage our exposure to exchange rate fluctuations on transactions denominated in currencies other than the local(functional) currencies of those operations. These contracts are valued based on quoted prices from the exchange and arecategorized in Level 1 of the fair value hierarchy.•Environmental credit obligations represent our liability for the purchase of (i) biofuel credits (primarily RINs in the U.S.) neededto satisfy our obligation to blend biofuels into the products we produce and (ii) emission credits under the California GlobalWarming Solutions Act (the California cap-and-trade system, also known as AB 32), Quebec’s Environmental Quality Act (theQuebec 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 andbiodiesel) 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 furtherdescribed in Note 19 under “Environmental Compliance Program Price Risk.” The liability for environmental credits is based onour deficit for such credits as of the balance sheet date, if any, after considering any credits acquired or under contract, and isequal to the product of the credits deficit and the market price of these credits as of the balance sheet date. The environmentalcredit obligations are categorized in Level 2 of the fair value hierarchy and are measured at fair value using the market approachbased on quoted prices from an independent pricing service.There were no transfers between levels for assets and liabilities held as of December 31, 2017 and 2016 that were measured at fairvalue on a recurring basis.There was no significant activity during the years ended December 31, 2017, 2016, and 2015 related to the fair value amountscategorized in Level 3 as of December 31, 2017, 2016, and 2015.Nonrecurring Fair Value MeasurementsAs discussed in Note 2, we concluded that the Aruba Terminal was impaired as of June 30, 2016, which resulted in an asset impairmentloss of $56 million that was recorded in June 2016. The fair value of the Aruba Terminal was determined using an income approachand was classified in Level 3. We employed a probability-weighted approach to possible future cash flow scenarios, includingtransferring ownership of the business to the GOA or continuing to operate the business.There were no assets or liabilities that were measured at fair value on a nonrecurring basis as of December 31, 2017 and 2016.131Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Other Financial InstrumentsFinancial instruments that we recognize in our balance sheets at their carrying amounts are shown in the following table along with theirassociated fair values (in millions): December 31, 2017 December 31, 2016 CarryingAmount FairValue CarryingAmount FairValueFinancial assets: Cash and temporary cash investments$5,850 $5,850 $4,816 $4,816Financial liabilities: Debt (excluding capital leases)8,310 9,795 7,926 8,882The methods and significant assumptions used to estimate the fair value of these financial instruments are as follows:•The fair value of cash and temporary cash investments approximates the carrying value due to the low level of credit risk ofthese assets combined with their short maturities and market interest rates (Level 1).•The fair value of debt is determined primarily using the market approach based on quoted prices provided by third-partybrokers and vendor pricing services (Level 2).19.PRICE RISK MANAGEMENT ACTIVITIESWe are exposed to market risks primarily related to the volatility in the price of commodities, and foreign currency exchange rates, andthe price of credits needed to comply with various government and regulatory programs. We enter into derivative instruments tomanage some of these risks, including derivative instruments related to the various commodities we purchase or produce, and foreigncurrency exchange and purchase contracts, as described below under “Risk Management Activities by Type of Risk.” These derivativeinstruments are recorded as either assets or liabilities measured at their fair values (see Note 18), as summarized below under “FairValues of Derivative Instruments,” with changes in fair value recognized currently in income. The effect of these derivative instrumentson our income is summarized below under “Effect of Derivative Instruments on Income.”Risk Management Activities by Type of RiskCommodity Price RiskWe are exposed to market risks related to the volatility in the price of crude oil, refined petroleum products (primarily gasoline anddistillate), grain (primarily corn), soybean oil, and natural gas used in our operations. To reduce the impact of price volatility on ourresults of operations and cash flows, we use commodity derivative instruments, including futures, swaps, and options. We use thefutures markets for the available liquidity, which provides greater flexibility in transacting our hedging and trading operations. We useswaps primarily to manage our price exposure. Our positions in commodity derivative instruments are monitored and managed on adaily basis by our risk control group to ensure compliance with our stated risk management policy that has been approved by our boardof directors.132Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)To manage commodity price risk, we use economic hedges, which are not designated as fair value or cash flow hedges, and we use fairvalue and cash flow hedges from time to time. We also enter into certain commodity derivative instruments for trading purposes. Ourobjectives 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 incertain (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 our economic hedgesare to hedge price volatility in certain feedstock and refined petroleum product inventories and to lock in the price of forecastedfeedstock, refined petroleum product, or natural gas purchases or refined petroleum product sales at existing market prices thatwe deem favorable. Economic hedges are not designated as fair value or cash flow hedges for accounting purposes, usually dueto the difficulty of establishing the required documentation at the date the derivative instrument is entered into for them toqualify as hedging instruments for accounting purposes.As of December 31, 2017, we had the following outstanding commodity derivative instruments that were used as economichedges, as well as commodity derivative instruments related to the physical purchase of corn at a fixed price. The informationpresents the notional volume of outstanding contracts by type of instrument and year of maturity (volumes in thousands ofbarrels, except those identified as corn contracts that are presented in thousands of bushels and soybean oil contracts that arepresented in thousands of pounds). Notional Contract Volumes byYear of MaturityDerivative Instrument 2018 2019Crude oil and refined petroleum products: Swaps – long 2,655 —Swaps – short 2,590 —Futures – long 83,296 —Futures – short 87,542 —Corn: Futures – long 21,315 35Futures – short 50,695 665Physical contracts – long 25,103 630Soybean oil: Futures – long 76,079 —Futures – short 154,378 —133Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)•Trading Derivatives – Our objective for entering into commodity derivative instruments for trading purposes is to takeadvantage of existing market conditions for crude oil and refined petroleum products.As of December 31, 2017, we had the following outstanding commodity derivative instruments that were entered into fortrading purposes. The information presents the notional volume of outstanding contracts by type of instrument and year ofmaturity (volumes in thousands of barrels, except those identified as corn contracts that are presented in thousands of bushels). Notional Contract Volumes byYear of MaturityDerivative Instrument 2018 2019Crude oil and refined petroleum products: Swaps – long 659 —Swaps – short 659 —Futures – long 37,532 —Futures – short 36,919 150Options – long 153,050 —Options – short 153,050 —Corn: Futures – long 300 —We had no commodity derivative contracts outstanding as of December 31, 2017 and 2016 or during the years ended December 31,2017 and 2016 that were designated as fair value or cash flow hedges.Foreign Currency RiskWe are exposed to exchange rate fluctuations on transactions entered into by our international operations that are denominated incurrencies other than the local (functional) currencies of these 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 accountingpurposes and therefore are classified as economic hedges. As of December 31, 2017, we had forward contracts to purchase$507 million of U.S. dollars. These commitments matured on or before January 31, 2018.Environmental Compliance Program Price RiskWe are exposed to market risk related to the volatility in the price of credits needed to comply with various governmental andregulatory environmental compliance programs. To manage this risk, we enter into contracts to purchase these credits when prices aredeemed favorable. Some of these contracts are derivative instruments; however, we elect the normal purchase exception and do notrecord these contracts at their fair values. Certain of these programs require us to blend biofuels into the products we produce, and weare subject to such programs in most of the countries in which we operate. These countries set annual quotas for the percentage ofbiofuels that must be blended into the motor fuels consumed in these countries. As a producer of motor fuels from petroleum, we areobligated to blend biofuels into the products we produce at a rate that is at least equal to the applicable quota. To the degree we areunable to blend at the applicable rate, we must purchase biofuel credits (primarily RINs in the U.S.). We are exposed to the volatility inthe134Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)market price of these credits, and we manage that risk by purchasing biofuel credits when prices are deemed favorable. For the yearsended December 31, 2017, 2016, and 2015, the cost of meeting our obligations under these compliance programs was $942 million,$749 million, and $440 million, respectively. These amounts are reflected in cost of materials and other.We are subject to additional requirements under GHG emission programs, including the cap-and-trade systems, as discussed in Note 18.Under these cap-and-trade systems, we purchase various GHG emission credits available on the open market. Therefore, we areexposed to the volatility in the market price of these credits. The cost to implement certain provisions of the cap-and-trade systems aresignificant; however, we recovered the majority of these costs from our customers for the years ended December 31, 2017, 2016, and2015 and expect to continue to recover the majority of these costs in the future. For the years ended December 31, 2017, 2016, and2015, the net cost of meeting our obligations under these compliance programs was immaterial.Fair Values of Derivative InstrumentsThe following tables provide information about the fair values of our derivative instruments as of December 31, 2017 and 2016(in millions) and the line items in the balance sheets in which the fair values are reflected. See Note 18 for additional information relatedto the fair values of our derivative instruments.As indicated in Note 18, we net fair value amounts recognized for multiple similar derivative contracts executed with the samecounterparty under master netting arrangements, including cash collateral assets and obligations. The following tables, however, arepresented on a gross asset and gross liability basis, which results in the reflection of certain assets in liability accounts and certainliabilities in asset accounts. Balance SheetLocation December 31, 2017 AssetDerivatives LiabilityDerivativesDerivatives not designated ashedging instruments Commodity contracts: FuturesReceivables, net $875 $955SwapsReceivables, net 11 11OptionsReceivables, net 8 3Physical purchase contractsInventories — 6Foreign currency contractsAccrued expenses — 7Total $894 $982135Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Balance SheetLocation December 31, 2016 AssetDerivatives LiabilityDerivativesDerivatives not designated ashedging instruments Commodity contracts: FuturesReceivables, net $874 $872SwapsReceivables, net 32 21OptionsReceivables, net 6 2Physical purchase contractsInventories — 5Foreign currency contractsReceivables, net 3 —Total $915 $900Market RiskOur price risk management activities involve the receipt or payment of fixed price commitments into the future. These transactions giverise to market risk, which is the risk that future changes in market conditions may make an instrument less valuable. We closely monitorand manage our exposure to market risk on a daily basis in accordance with policies approved by our board of directors. Market risksare monitored by our risk control group to ensure compliance with our stated risk management policy. We do not require any collateralor other security to support derivative instruments into which we enter. We also do not have any derivative instruments that require usto maintain a minimum investment-grade credit rating.Effect of Derivative Instruments on IncomeThe following tables provide information about the gain or loss recognized in income on our derivative instruments and the incomestatement line items in which such gains and losses are reflected (in millions).Derivatives Designated asEconomic Hedges Location of Gain (Loss)Recognized in Incomeon Derivatives Year Ended December 31, 2017 2016 2015Commodity contracts Cost of materials and other $(344) $(132) $377Foreign currency contracts Cost of materials and other (40) 16 49Trading Derivatives Location of GainRecognized in Incomeon Derivatives Year Ended December 31, 2017 2016 2015Commodity contracts Cost of materials and other $66 $46 $45136Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)20.QUARTERLY FINANCIAL DATA (Unaudited)The following table summarizes quarterly financial data for the years ended December 31, 2017 and 2016 (in millions, except per shareamounts). 2017 Quarter Ended March 31 June 30 September 30 December 31 (b)Operating revenues$21,772 $22,254 $23,562 $26,392Gross profit (a)739 1,063 1,624 1,121Operating income537 871 1,338 853Net income321 572 863 2,400Net income attributable toValero Energy Corporationstockholders305 548 841 2,371Earnings per common share0.68 1.23 1.91 5.43Earnings per common share –assuming dilution0.68 1.23 1.91 5.42 2016 Quarter Ended March 31 (c) June 30 (d) September 30 (e) December 31Operating revenues$15,714 $19,584 $19,649 $20,712Gross profit (a)997 1,457 1,096 841Operating income829 1,231 892 620Net income513 843 645 416Net income attributable toValero Energy Corporationstockholders495 814 613 367Earnings per common share1.05 1.74 1.33 0.81Earnings per common share –assuming dilution1.05 1.73 1.33 0.81___________________________ (a)Gross profit is calculated as operating revenues less total cost of sales.(b)During the quarter ended December 31, 2017, we recognized an income tax benefit of $1.9 billion related to Tax Reform as described in Note 14.(c)During the quarter ended March 31, 2016, we recognized a favorable noncash lower of cost or market inventory valuation adjustment of $293 million asdescribed in Note 4.(d)During the quarter ended June 30, 2016, we recognized a favorable noncash lower of cost or market inventory valuation adjustment of $454 million asdescribed in Note 4 and an asset impairment loss of $56 million related to the Aruba Disposition as described in Note 2.(e)During the quarter ended September 30, 2016, we recognized a tax benefit of $42 million related to the Aruba Disposition as described in Note 2.137Table of ContentsITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIALDISCLOSURENone.ITEM 9A. CONTROLS AND PROCEDURESDisclosure Controls and Procedures. Our management has evaluated, with the participation of our principal executive officer andprincipal financial officer, the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the SecuritiesExchange Act of 1934) as of the end of the period covered by this report, and has concluded that our disclosure controls andprocedures were effective as of December 31, 2017.Internal Control over Financial Reporting.(a) Management’s Report on Internal Control over Financial Reporting.The management report on Valero’s internal control over financial reporting required by Item 9A appears in Item 8 on page 65 of thisreport, and is incorporated herein by reference.(b) Attestation Report of the Independent Registered Public Accounting Firm.KPMG LLP’s report on Valero’s internal control over financial reporting appears in Item 8 beginning on page 67 of this report, and isincorporated herein by reference.(c) 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 materiallyaffected, or is reasonably likely to materially affect, our internal control over financial reporting.We continue the implementation process to prepare for the adoption of ASU No. 2016-02, “Leases (Topic 842),” which we discussmore fully in Note 1 of Notes to Consolidated Financial Statements. We expect that there will be changes affecting our internal controlover financial reporting in conjunction with adopting this standard. The most significant changes we expect relate to the implementationof a lease evaluation system and a lease accounting system, including the integration of our lease accounting system with our generalledger and modifications to the related procurement and payment processes.ITEM 9B. OTHER INFORMATIONNone.PART IIIITEMS 10-14.The information required by Items 10 through 14 of Form 10-K is incorporated herein by reference to the definitive proxy statement forour 2018 annual meeting of stockholders. We will file the proxy statement with the SEC on or before March 31, 2018.138Table of ContentsPART IVITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES(a) 1. Financial Statements. The following consolidated financial statements of Valero Energy Corporation and its subsidiaries areincluded in Part II, Item 8 of this Form 10-K: PageManagement’s report on internal control over financial reporting65Reports of independent registered public accounting firm66Consolidated balance sheets as of December 31, 2017 and 201669Consolidated statements of income for the years ended December 31, 2017, 2016, and 201570Consolidated statements of comprehensive income for the years ended December 31, 2017, 2016, and 201571Consolidated statements of equity for the years ended December 31, 2017, 2016, and 201572Consolidated statements of cash flows for the years ended December 31, 2017, 2016, and 201573Notes to consolidated financial statements742. Financial Statement Schedules and Other Financial Information. No financial statement schedules are submitted becauseeither they are inapplicable or because the required information is included in the consolidated financial statements or notes thereto.3. Exhibits. Filed as part of this Form 10-K are the following exhibits: 3.01—Amended and Restated Certificate of Incorporation of Valero Energy Corporation, formerly known as Valero Refining and MarketingCompany–incorporated by reference to Exhibit 3.1 to Valero’s Registration Statement on Form S-1 (SEC File No. 333-27013) filedMay 13, 1997. 3.02—Certificate of Amendment (July 31, 1997) to Restated Certificate of Incorporation of Valero Energy Corporation–incorporated by referenceto Exhibit 3.02 to Valero’s Annual Report on Form 10-K for the year ended December 31, 2003 (SEC File No. 1-13175). 3.03—Certificate of Merger of Ultramar Diamond Shamrock Corporation with and into Valero Energy Corporation dated December 31, 2001–incorporated by reference to Exhibit 3.03 to Valero’s Annual Report on Form 10-K for the year ended December 31, 2003 (SEC File No. 1-13175). 3.04—Amendment (effective December 31, 2001) to Restated Certificate of Incorporation of Valero Energy Corporation–incorporated byreference to Exhibit 3.1 to Valero’s Current Report on Form 8-K dated December 31, 2001, and filed January 11, 2002 (SEC File No. 1-13175). 3.05—Second Certificate of Amendment (effective September 17, 2004) to Restated Certificate of Incorporation of Valero Energy Corporation–incorporated by reference to Exhibit 3.04 to Valero’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 (SEC FileNo. 1-13175). 3.06—Certificate of Merger of Premcor Inc. with and into Valero Energy Corporation effective September 1, 2005–incorporated by reference toExhibit 2.01 to Valero’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005 (SEC File No. 1-13175). 3.07—Third Certificate of Amendment (effective December 2, 2005) to Restated Certificate of Incorporation of Valero Energy Corporation–incorporated by reference to Exhibit 3.07 to Valero’s Annual Report on Form 10-K for the year ended December 31, 2005 (SEC File No. 1-13175). 3.08—Fourth Certificate of Amendment (effective May 24, 2011) to Restated Certificate of Incorporation of Valero Energy Corporation–incorporated by reference to Exhibit 4.8 to Valero’s Current Report on Form 8-K dated and filed May 24, 2011 (SEC File No. 1-13175). 139Table of Contents3.09—Fifth Certificate of Amendment (effective May 13, 2016) to Restated Certificate of Incorporation of Valero Energy Corporation–incorporated by reference to Exhibit 3.02 to Valero’s Current Report on Form 8-K dated May 12, 2016, and filed May 18, 2016 (SEC FileNo. 1-13175). 3.10—Amended and Restated Bylaws of Valero Energy Corporation–incorporated by reference to Exhibit 3.01 to Valero’s Current Report onForm 8-K dated September 20, 2017 and filed September 21, 2017 (SEC File No. 1-13175). 4.01—Indenture dated as of December 12, 1997 between Valero Energy Corporation and The Bank of New York–incorporated by reference toExhibit 3.4 to Valero’s Registration Statement on Form S-3 (SEC File No. 333-56599) filed June 11, 1998. 4.02—First Supplemental Indenture dated as of June 28, 2000 between Valero Energy Corporation and The Bank of New York (including Form of7 3/4% Senior Deferrable Note due 2005)–incorporated by reference to Exhibit 4.6 to Valero’s Current Report on Form 8-K dated June 28,2000, and filed June 30, 2000 (SEC File No. 1-13175). 4.03—Indenture (Senior Indenture) dated as of June 18, 2004 between Valero Energy Corporation and Bank of New York–incorporated byreference to Exhibit 4.7 to Valero’s Registration Statement on Form S-3 (SEC File No. 333-116668) filed June 21, 2004. 4.04—Form of Indenture related to subordinated debt securities–incorporated by reference to Exhibit 4.8 to Valero’s Registration Statement onForm S-3 (SEC File No. 333-116668) filed June 21, 2004. 4.05—Specimen Certificate of Common Stock–incorporated by reference to Exhibit 4.1 to Valero’s Registration Statement on Form S-3 (SEC FileNo. 333-116668) filed June 21, 2004. *+10.01—Valero Energy Corporation Annual Bonus Plan, amended and restated as of February 28, 2018. +10.02—Valero Energy Corporation Annual Incentive Plan for Named Executive Officers–incorporated by reference to Exhibit 10.01 to Valero’sCurrent Report on Form 8-K dated February 22, 2012, and filed February 27, 2012 (SEC File No. 1-13175). +10.03—Valero Energy Corporation 2005 Omnibus Stock Incentive Plan, amended and restated as of October 1, 2005–incorporated by reference toExhibit 10.02 to Valero’s Annual Report on Form 10-K for the year ended December 31, 2009 (SEC File No. 1-13175). +10.04—Valero Energy Corporation 2011 Omnibus Stock Incentive Plan, amended and restated February 25, 2016–incorporated by reference toExhibit 10.04 to Valero’s Annual Report on Form 10-K for the year ended December 31, 2015 (SEC File No. 1-13175). +10.05—Valero Energy Corporation Deferred Compensation Plan, amended and restated as of January 1, 2008–incorporated by reference toExhibit 10.04 to Valero’s Annual Report on Form 10-K for the year ended December 31, 2008 (SEC File No. 1-13175). +10.06—Valero Energy Corporation Amended and Restated Supplemental Executive Retirement Plan, amended and restated as of November 10,2008–incorporated by reference to Exhibit 10.08 to Valero’s Annual Report on Form 10-K for the year ended December 31, 2008 (SEC FileNo. 1-13175). +10.07—Valero Energy Corporation Excess Pension Plan, as amended and restated effective December 31, 2011–incorporated by reference toExhibit 10.10 to Valero’s Annual Report on Form 10-K for the year ended December 31, 2011 (SEC File No. 1-13175). +10.08—Form of Indemnity Agreement between Valero Energy Corporation (formerly known as Valero Refining and Marketing Company) andcertain officers and directors–incorporated by reference to Exhibit 10.8 to Valero’s Registration Statement on Form S-1 (SEC File No. 333-27013) filed May 13, 1997. +10.09—Schedule of Indemnity Agreements–incorporated by reference to Exhibit 10.12 to Valero’s Annual Report on Form 10-K for the year endedDecember 31, 2015 (SEC File No. 1-13175). +10.10—Form of Change of Control Severance Agreement (Tier I) between Valero Energy Corporation and executive officer–incorporated byreference to Exhibit 10.15 to Valero’s Annual Report on Form 10-K for the year ended December 31, 2011 (SEC File No. 1-13175). +10.11—Schedule of Tier I Change of Control Severance Agreements–incorporated by reference to Exhibit 10.14 to Valero’s Annual Report onForm 10-K for the year ended December 31, 2015 (SEC File No. 1-13175). 140Table of Contents+10.12—Form of Change of Control Severance Agreement (Tier II) between Valero Energy Corporation and executive officer–incorporated byreference to Exhibit 10.16 to Valero’s Annual Report on Form 10-K for the year ended December 31, 2013 (SEC File No. 1-13175). +10.13—Schedule of Tier II Change of Control Severance Agreements–incorporated by reference to Exhibit 10.16 to Valero’s Annual Report onForm 10-K for the year ended December 31, 2015 (SEC File No. 1-13175). +10.14—Form of Amendment (dated January 7, 2013) to Change of Control Severance Agreements (to eliminate excise tax gross-up benefit)–incorporated by reference to Exhibit 10.17 to Valero’s Annual Report on Form 10-K for the year ended December 31, 2012 (SEC File No. 1-13175). +10.15—Form of Change of Control Severance Agreement (Tier II-A) between Valero Energy Corporation and executive officer–incorporated byreference to Exhibit 10.02 to Valero’s Current Report on Form 8-K dated November 2, 2016, and filed November 7, 2016 (SEC File No. 1-13175). +10.16—Schedule of Tier II-A Change of Control Severance Agreements–incorporated by reference to Exhibit 10.19 to Valero’s Annual Report onForm 10-K for the year ended December 31, 2016 (SEC File No. 1-13175). +10.17—Form of Amendment (dated January 17, 2017) to Change of Control Severance Agreements, amending Section 9 thereof–incorporated byreference to Exhibit 10.01 to Valero’s Current Report on Form 8-K dated and filed January 17, 2017 (SEC File No. 1-13175). *+10.18—Form of Performance Share Award Agreement pursuant to the Valero Energy Corporation 2011 Omnibus Stock Incentive Plan. +10.19—Form of Stock Option Agreement pursuant to the Valero Energy Corporation 2011 Omnibus Stock Incentive Plan–incorporated byreference to Exhibit 10.21 to Valero’s Annual Report on Form 10-K for the year ended December 31, 2011 (SEC File No. 1-13175). +10.20—Form of Performance Stock Option Agreement pursuant to the Valero Energy Corporation 2011 Omnibus Stock Incentive Plan–incorporated by reference to Exhibit 10.21 to Valero’s Annual Report on Form 10-K for the year ended December 31, 2012 (SEC File No. 1-13175). +10.21—Form of Restricted Stock Agreement pursuant to the Valero Energy Corporation 2011 Omnibus Stock Incentive Plan–incorporated byreference to Exhibit 10.25 to Valero’s Annual Report on Form 10-K for the year ended December 31, 2012 (SEC File No. 1-13175). 10.22—$3,000,000,000 5-Year Third Amended and Restated Revolving Credit Agreement, dated as of November 12, 2015, among Valero EnergyCorporation, as Borrower; JPMorgan Chase Bank, N.A., as Administrative Agent; and the lenders named therein–incorporated by referenceto Exhibit 10.1 to Valero’s Current Report on Form 8-K dated November 12, 2015, and filed November 13, 2015 (SEC File No. 1-13175). *12.01—Statements of Computations of Ratios of Earnings to Fixed Charges. 14.01—Code of Ethics for Senior Financial Officers–incorporated by reference to Exhibit 14.01 to Valero’s Annual Report on Form 10-K for theyear ended December 31, 2003 (SEC File No. 1-13175). *21.01—Valero Energy Corporation subsidiaries. *23.01—Consent of KPMG LLP dated February 28, 2018. *24.01—Power of Attorney dated February 28, 2018 (on the signature page of this Form 10-K). *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). *99.01—Audit Committee Pre-Approval Policy. ***101—Interactive Data Files141Table of Contents______________*Filed herewith.**Furnished herewith.***Submitted electronically herewith.+Identifies management contracts or compensatory plans or arrangements required to be filed as an exhibit hereto.Pursuant to paragraph 601(b)(4)(iii)(A) of Regulation S-K, the registrant has omitted from the foregoing listing of exhibits, and hereby agrees to furnish to theSEC upon its request, copies of certain instruments, each relating to debt not exceeding 10 percent of the total assets of the registrant and its subsidiaries on aconsolidated basis.142Table of ContentsSIGNATUREPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized. VALERO ENERGY CORPORATION(Registrant) By:/s/ Joseph W. Gorder (Joseph W. Gorder) Chairman of the Board, President,and Chief Executive OfficerDate: February 28, 2018143Table of ContentsPOWER OF ATTORNEYKNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Joseph W. Gorder, Michael S.Ciskowski, and Jay D. Browning, or any of them, each with power to act without the other, his true and lawful attorney-in-fact and agent, with full power ofsubstitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any or all subsequent amendments and supplements to thisAnnual Report on Form 10-K, and to file the same, or cause to be filed the same, with all exhibits thereto, and other documents in connection therewith, with theSecurities and Exchange Commission, granting unto each said attorney-in-fact and agent full power to do and perform each and every act and thing requisite andnecessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby qualifying and confirming all that saidattorney-in-fact and agent or his substitute or substitutes may lawfully do or cause to be done by virtue hereof.Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in thecapacities and on the dates indicated.Signature Title Date /s/ Joseph W. Gorder Chairman of the Board, President,and Chief Executive Officer(Principal Executive Officer) February 28, 2018(Joseph W. Gorder) /s/ Michael S. Ciskowski Executive Vice Presidentand Chief Financial Officer(Principal Financial and Accounting Officer) February 28, 2018(Michael S. Ciskowski) /s/ H. Paulett Eberhart Director February 28, 2018(H. Paulett Eberhart) /s/ Kimberly S. Greene Director February 28, 2018(Kimberly S. Greene) /s/ Deborah P. Majoras Director February 28, 2018(Deborah P. Majoras) /s/ Donald L. Nickles Director February 28, 2018(Donald L. Nickles) /s/ Philip J. Pfeiffer Director February 28, 2018(Philip J. Pfeiffer) /s/ Robert A. Profusek Director February 28, 2018(Robert A. Profusek) /s/ Susan Kaufman Purcell Director February 28, 2018 (Susan Kaufman Purcell) /s/ Stephen M. Waters Director February 28, 2018(Stephen M. Waters) /s/ Randall J. Weisenburger Director February 28, 2018(Randall J. Weisenburger) /s/ Rayford Wilkins, Jr. Director February 28, 2018(Rayford Wilkins, Jr.) 144Exhibit 10.01Valero Energy CorporationAnnual Bonus Plan(Amended and Restated through February 28, 2018)Table of ContentsArticle Topic Page 1 Definitions 22 Administration 33 Participation 44 Determination of Bonus Awards 45 Bonus Targets 56 Form of Payment, Recapture 57 Miscellaneous Terms and Provisions 6INTRODUCTIONThe Valero Energy Corporation Annual Bonus Plan (the “Plan”) has been established for the purpose of providing bonus compensationto eligible employees employed by Affiliates of Valero Energy Corporation (hereinafter collectively referred to as the “Company”).Any bonus compensation is contingent upon the Company’s overall fiscal performance as well as the Participant’s adherence toCompany standards and policies. The Compensation Committee of the Board has the discretion to authorize (or not authorize) anybonus payment under this Plan. The Company intends and desires to incentivize employees to comply with Company standards andpolicies in order to foster continued Company profitability.Article 1 – DefinitionsFor purposes of the Plan, unless the context requires otherwise, the following terms have the meanings set forth below.1.1“Affiliate” means (a) any entity that, directly or indirectly through one or more intermediaries, is controlled by the Companyand (b) any entity in which the Company has a significant equity interest, in each case determined by the Committee.1.2“Board” means the Board of Directors of the Company.1.3“Bonus Target” means a percentage established to represent a target bonus percentage determined through competitive surveyanalysis reflecting the Company’s stated compensation philosophy and based on each position’s relative importance to theoverall financial success of the Company.1.4“Committee” means the Compensation Committee of the Board.1.5“Company” means Valero Energy Corporation and its Affiliates.1.6“Discretionary Adjustment ” means the unrestricted authority of the Committee:(i)to determine whether to award or not to award a bonus to individuals, and to determine the amount of any award; and(ii)to adjust or award the bonus amounts payable to subgroups of Participants in greater or lesser percentages than amountsto be paid to other Participants;with all such discretion to be based upon such factors as the Committee deems appropriate.1.7“Employee” means an employee of the Company.1.8“Fair Market Value” means, with respect to any property (including, without limitation, any shares, units or other securities), thefair market value of such property determined by such methods or procedures as shall be established from time to time by theCommittee. Unless otherwise determined by the Committee, the Fair Market Value of a share of ValeroPage 2common stock on a given date for purposes of the Plan shall be the mean of the high and low sales price per share of Valerocommon stock as reported on the New York Stock Exchange on such date or, if such Exchange is not open for trading on suchdate, on the next following date when such Exchange is open for trading.1.9“Participant” means an Employee who is selected by the Committee to participate in the Plan.1.10“Peer Group” means those companies in the petroleum and energy services industry sector designated by the Committee ascomparator companies which may be benchmarked for determining the Company’s performance as measured by selectedPerformance Criteria.1.11“Performance Criteria” means those performance measures approved by the Compensation Committee that determine the levelof Bonus Target to be earned, subject to any Discretionary Adjustment.1.12“Plan Year” means the Company’s fiscal year.1.13“Plan” means the Valero Energy Corporation Annual Bonus Plan.Article 2 – Administration2.1The Plan shall be administered by the Committee. The Committee shall consist of at least three “Non-Employee Directors” (asdefined in Rule 16b-3 under the Securities Exchange Act of 1934, as amended from time to time). If the Committee fails to meetthe foregoing criteria, then additional non-employee persons shall be appointed by the Board for purposes of administering thisPlan so that the committee administering this Plan shall be composed solely of three or more Non-Employee Directors.2.2 The Committee is empowered to:(a)Review and approve all determinations relating to the eligibility of Participants;(b)Make rules and regulations for the administration of the Plan that are not inconsistent with the terms and provisionshereof;(c)Construe all terms, provisions, conditions, and limitations of the Plan in good faith;(d)Review and approve (i) determinations on whether to grant any award and (ii) any computations concerning the amountsto which any Participant or his or her beneficiary may receive under the Plan;(e)Select, employ, and compensate from time to time consultants, accountants, attorneys and other agents as the Committeemay deem necessary or advisable for the proper and efficient administration of the Plan.Page 32.3The foregoing list of express powers is not intended to be either complete or exclusive, but the Committee shall, in addition,have such powers, whether or not expressly authorized, that it may deem necessary, desirable, advisable, or proper for thesupervision and administration of the Plan. Except as otherwise specifically provided herein, the decision or judgment of theCommittee on any question arising hereunder in connection with the exercise of any of its powers shall be final, binding, andconclusive upon all parties concerned.2.4The Committee shall have the responsibility of authorizing payment to each eligible Participant and directing that such paymentbe disbursed by the Company.2.5The Board or the Committee may, at any time (including during the course of a Plan Year), amend or terminate the Plan. Suchamendments or terminations may be made without the consent of the Participants.2.6For the avoidance of doubt, the Committee is empowered, in its sole discretion, to substantially reduce or eliminate altogether abonus for a Participant in any Plan Year, based upon the Company’s or the Committee’s view of the Participant’s disciplinarystatus, job performance, or any other factor.Article 3 – Participation3.1The designation of Employees of the Company as Participants under the Plan shall be approved by the Committee, and noEmployee of the Company will have the right to require the Committee to make him or her a Participant or to allow him or herto remain a Participant under the Plan. The designation of an Employee as a Participant in the Plan does not guarantee thepayment of any bonus award under the Plan.Article 4 – Determination of Bonus Awards4.1During the course of the Plan Year, the Committee shall review and approve those Performance Criteria which the Committeebelieves will measure the Company’s financial, stockholder, and/or operational performance for the applicable Plan Year. ThePerformance Criteria will be developed by Company management and submitted to the Committee for review and discussion.The Committee may request Company management to provide threshold, target, and maximum levels of performance for eachPerformance Criteria considered.4.2The Company’s performance may be evaluated on an absolute basis by determining the Company’s achievement versus abudgeted or pre-established level of performance approved by the Committee. Likewise, the Company’s performance may beevaluated by the Committee’s evaluation of the Company’s performance or by comparing the Company’s performance againsta Peer Group’s performance achievement for the same Performance Criteria. The measurement process for purposes of the planmay include both quantitative and qualitative assessments by the Committee.Page 44.3When the Performance Criteria are established and approved during the course of the Plan Year, the Committee may elect toweight each of the Performance Criteria based upon the strategic importance of the respective Performance Criteria inconsideration of the Company’s annual business plan. The weightings of the Performance Criteria may change from one PlanYear to the next.4.4In determining the Company’s performance during a measurement period, Performance Criteria will be utilized. ThesePerformance Criteria may be modified, deleted, or added to from one Plan Year to the next as determined by the Committee inits judgment and discretion. Further, these performance criteria may be established in either quantitative or qualitative format forpurposes of measurement.4.5Following the close of the Plan Year, the Committee will evaluate the Company’s performance compared to the PerformanceCriteria. The results of this evaluation will serve as the basis for the determination of the amount of Bonus Target achieved,which may range from 0 percent to as much as 200 percent of Participants’ Bonus Targets. The Committee may then consideran addition to or subtraction from the bonus by applying a Discretionary Adjustment as the Committee may determine.4.6The Committee will normally authorize the payment of bonus awards within two and one-half months (75 days) after the closeof the Plan Year. However, the Committee reserves the right to accelerate the determination and payment of bonus awards priorto the completion of the Plan Year based on the estimated or expected performance of the Company for such Plan Year.Article 5 – Bonus Targets5.1Bonus Targets for each position are established based upon competitive survey data consistent with the Company’s statedexecutive compensation philosophy and the position’s deemed relative importance to the overall financial success of theCompany. The Committee shall review and approve a Bonus Target for each officer.5.2Each bonus award shall be calculated by using the established Bonus Target for Participants in the Plan, adjusted by the resultsof the Performance Criteria and any Discretionary Adjustment. An evaluation of a Participant’s individual performance may alsobe used to adjust a Participant’s bonus award.5.3The fact that a Bonus Target is established for any position does not guarantee any payment of a bonus award under this Plan toany Participant.Article 6 – Form of Payment; Recapture by the Company (“Clawback”)6.1Bonuses payable under the Plan shall be paid in the form of cash in whole or in part or, if permitted under applicable NYSE andSEC rules and regulations, in the form of common stock of the Company in whole or in part.Page 56.2With respect to Plan bonuses payable in part or in whole in shares of common stock of the Company, a Participant may pay allor part of the amount of any taxes required to be collected or withheld by the Company upon payment of the Participant’sbonus by electing, before an established date prior to the time of payment of the bonus, to have the Company withhold from thenumber of common shares otherwise deliverable under the bonus a number of common shares having a Fair Market Value onthe established date not exceeding the amount of the tax payment. For this purpose, federal income tax may be withheld at thehighest personal tax rate then in effect.6.3The Committee may approve a deferral of the payment of bonuses with payment in whole at a later date or in installments overa period of time. The length of time of deferral or installment period will be determined at the discretion of the Committee inaccordance with applicable laws and regulations. Such deferrals will be credited to the individual participant’s nonqualifieddeferred compensation account.6.4Payments made under the Plan remain subject to recapture by the Company under the terms and conditions of the Company’sPolicy on Executive Compensation in Restatement Situations (“Policy”), as the Policy may be in effect from time to time.Article 7 – Miscellaneous Terms and Provisions7.1No Employee shall have any claim or right to be paid a bonus in any amount or in any form of award, and any award of abonus will not be construed as giving a Participant the right to be retained in the employ of the Company. Similarly, regardlessof the circumstances under which a Participant resigns or terminates his or her employment or is involuntarily terminated, he orshe has no claim or right to a bonus, in whole or in part. Further, the Company expressly reserves the right at any time toterminate the employment of any Employee or Participant free from any liability under the Plan.7.2The validity, construction, and effect of the Plan and any actions taken or relating to the Plan shall be determined in accordancewith the laws of the State of Texas and applicable Federal law.7.3The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all orsubstantially all of the business and/or assets of the Company, expressly to assume and agree to perform the Company’sobligations under this Plan in the same manner and to the same extent that the Company would be required to perform them ifno such succession had taken place. As used herein, the “Company” shall mean the Company as hereinbefore defined and anyaforesaid successor to its business and/or assets.7.4No member of the Board or the Committee, nor any officer or Employee of the Company acting on behalf of the Board or theCommittee, shall be personally liable for any action, determination, or interpretation taken or made in good faith with respect tothe Plan, and all members of the Board or the Committee and each and any officer or Employee of the Company acting on theirbehalf shall, to the extent permitted by law, be fully indemnifiedPage 6and protected by the Company in respect of any such action, determination, or interpretation.7.5Notwithstanding anything in this Plan to the contrary, if any Plan provision or bonus award under the Plan would result in theimposition of an applicable tax under Section 409A of the Internal Revenue Code of 1986, as amended, and related regulationsand Treasury pronouncements (“Section 409A”), that Plan provision or bonus award may be reformed to avoid imposition ofthe applicable tax and no action taken to comply with Section 409A shall be deemed to adversely affect the Participant’s rightsto an award.Page 7Exhibit 10.18PERFORMANCE SHARE AGREEMENTThis Performance Share Agreement (the “Agreement”) is entered into as of _____, 20__, by and between Valero Energy Corporation,a Delaware corporation (“Valero”), and __________, a participant (the “Participant”) in Valero’s 2011 Omnibus Stock Incentive Plan(as may be amended, the “Plan”), pursuant to and subject to the provisions of the Plan.1.Grant of Performance Shares. Valero hereby grants to Participant _______ Performance Shares pursuant to Section 6.7 of thePlan. The Performance Shares represent rights to receive shares of Common Stock of Valero, subject to the terms and conditionsof this Agreement and the Plan.2.Vesting and Delivery of Shares.A.Vesting. The Performance Shares granted hereunder shall vest over a period of three years in equal, one-third incrementswith the first increment vesting on the date of the regularly scheduled meeting of the Board’s Compensation Committee inJanuary 2019, and the second and third increments vesting on the Committee’s meeting dates in January 2020 andJanuary 2021, respectively (each of these vesting dates is referred to as a “Normal Vesting Date”); any award(s) of sharesof Common Stock resulting in connection with such vesting shall be subject to verification of attainment of thePerformance Objectives described in Section 4 below by the Compensation Committee. If the Committee is unable to meetin January of a given year, then the Normal Vesting Date for that year will be the date not later than March 31 of that yearas selected by the Compensation Committee.B.Rights. Until shares of Common Stock are actually issued to Participant (or his or her estate) in settlement of thePerformance Shares, neither Participant nor any person claiming by, through or under Participant shall have any rights as astockholder of Valero (including, without limitation, voting rights or any right to receive dividends or other distributions)with respect to such shares.C.Distribution. Any shares of Common Stock to be distributed under the terms of this Agreement shall be distributed as soonas administratively practicable after Performance Objectives described in Section 4 below have been verified by theCompensation Committee, but not later than two-and-one-half months following the end of the year in which suchverification occurred.3.Performance Period. Except as provided below with respect to a Change of Control (as defined in the Plan), the “PerformancePeriod” for any Performance Shares eligible to vest on any Normal Vesting Date shall be as follows:A.First Segment. The Performance Period for the first one-third vesting of Performance Shares (those vesting on the NormalVesting Date in January 2019) shall be the calendar year ending on December 31, 2018.B.Second Segment. The Performance Period for the second one-third vesting of Performance Shares (those vesting on theNormal Vesting Date in January 2020) shall be the two calendar years ending December 31, 2019.Page 1C.Third Segment. The Performance Period for the final one-third vesting of Performance Shares (those vesting on the NormalVesting Date in January 2021) shall be the three calendar years ending December 31, 2020.4.Performance Objectives.A.Total Shareholder Return. Total Shareholder Return (“TSR”) will be compiled for a peer group of companies (the “TargetGroup”) for the Performance Period immediately preceding each Normal Vesting Date. TSR for each such company ismeasured by dividing (A) the sum of (i) the dividends on the common stock of such company during the PerformancePeriod, assuming dividend reinvestment, and (ii) the difference between the average closing price of a share of suchcompany’s common stock for the 30 days of December 2 to December 31 at the end of the Performance Period and theaverage closing price of such shares for the 30 days of December 2 to December 31 immediately prior to the beginning ofthe Performance Period (appropriately adjusted for any stock dividend, stock split, spin-off, merger or other similarcorporate events), by (B) the average closing price of a share of such company’s common stock for the 30 days ofDecember 2 to December 31 immediately prior to the beginning of the Performance Period.B.Target Group. The applicable Target Group shall be selected by the Compensation Committee, acting in its sole discretion,each year not later than 90 days after the commencement of the calendar year preceding each Normal Vesting Date. Thesame Target Group shall be used to measure TSR with regard to all Performance Shares vesting under all PerformanceAward Agreements of Valero having a similar Normal Vesting Date.C.Performance Ranking and Award of Common Shares. For each Performance Period, the TSR for Valero and eachcompany in the Target Group shall be arranged by rank from highest performer to lowest performer according to the TSRachieved by each company. Shares of Common Stock will be awarded to Participant in accordance with Valero’spercentile ranking within the Target Group. The number of shares of Common Stock, if any, that Participant will beentitled to receive in settlement of the vested Performance Shares will be determined on each Normal Vesting Date and,subject to the provisions of the Plan and this Agreement, on such Normal Vesting Date, the following percentage of thevested Performance Shares will be awarded as shares of Common Stock to the Participant when Valero’s TSR during thePerformance Period falls within the following percentiles (“Percentiles”):RankingPercentilePayout1100.0%200.0%288.9%200.0%377.8%171.4%466.7%142.9%555.6%114.3%644.4%85.7%733.3%57.1%822.2%28.6%911.1%0.0%100.0%0.0%Page 2D.Unearned Shares. Any Performance Shares not awarded as shares of Common Stock on a Normal Vesting Date willexpire and be forfeited; such Performance Shares may not be carried forward for any additional Performance Period.5.Dividend Equivalent Award. In addition to the Performance Shares granted in Section 1, the Participant is granted a DividendEquivalent Award payable in shares of Common Stock, as provided herein. On each Normal Vesting Date, the amount ofdividends paid to holders of Common Stock during the applicable Performance Period shall be determined with respect to theParticipant’s Performance Shares that are vesting on that Normal Vesting Date—calculated as if the Performance Shares wereoutstanding shares of Common Stock (the resulting value being hereafter referred to as the “Target Dividend EquivalentValue”). The Target Dividend Equivalent Value shall then be subject to further calculation according to Valero’s TSR rankingduring the Performance Period as prescribed in Section 4.C. above (i.e., payout from 0% to 200% depending on Valero’s TSRranking). The number of shares of Common Stock payable to Participant with respect to the Dividend Equivalent Award isequal to (x) the Target Dividend Equivalent Value multiplied by the Performance Period’s payout percentage calculated perSection 4.C., divided by (y) the Fair Market Value of the Common Stock on the Normal Vesting Date (the resulting numberbeing rounded up to the nearest whole number of shares). See Exhibit A for an example of this calculation.6.Termination of Employment.A.Voluntary Termination, Termination for “Cause,” and Early Retirement. If Participant’s employment is(i) voluntarily terminated by the Participant (other than through normal retirement, death or disability), includingtermination in connection with Participant’s voluntary early retirement (i.e., prior to age 62),(ii) terminated by Valero for “cause” (as defined pursuant to the Plan),then those Performance Shares that are outstanding and have not vested as of the effective date of termination shallthereupon be forfeited.B.Retirement. If a Participant’s employment is terminated through his or her normal retirement (i.e., age 62+ retirement),then any Performance Shares that (i) have not theretofore vested or been forfeited, and (ii) were granted at least one yearprior to the Participant’s effective date of retirement, shall continue to remain outstanding and shall vest on the NormalVesting Dates according to their original vesting schedule.But any outstanding Performance Shares that were granted within one year of the Participant’s effective date of retirementshall be prorated as follows. The outstanding Performance Shares shall be prorated based on the number of months workedfrom the date of grant to the Participant’s retirement date (rounding upward), and the prorated number of PerformanceShares shall thereafter vest on the Normal Vesting Dates according to their original vesting schedule. Example:•25,530 Performance Shares granted on November 1, 2017,•normal retirement date of Participant is effective April 15, 2018,•working period is calculated as 6 months (5 full months plus partial month rounding upward to 6 months),•original grant is adjusted by 6/12ths (50%) resulting in 12,765 Performance Shares to vest according to theiroriginal vesting schedule.Page 3C.Death, Disability, Involuntary Termination Other Than for “Cause,” and Change of Control. If a Participant’semployment is terminated (i) through death or disability, or (ii) by Valero other than for cause (as determined pursuant tothe Plan), or (iii) as a result of a Change of Control (as described in the Plan) (each of the foregoing is hereafter referred toas a “Trigger Date”), then each Performance Period with respect to any Performance Shares that have not vested or beenforfeited shall be terminated effective as of such Trigger Date; the TSR for Valero and for each company in the TargetGroup shall be determined for each such shortened Performance Period and the percentage of Performance Shares to beawarded as shares of Common Stock for each such shortened Performance Period shall be determined in accordance withSection 4 and shall be distributed as soon as administratively practicable thereafter.(i)For purposes of determining the number of Performance Shares to be received as of any Trigger Date, the TargetGroup as most recently determined by the Compensation Committee prior to the Trigger Date shall be used.(ii)If the Trigger Date is the result of a Change of Control, then the number of shares of Common Stock to be awardedto the Participant shall be prorated commensurate with the length of service of the Participant during eachPerformance Period. See Exhibit B for an example of this calculation.7.Cash Payment Election. Effective on any Normal Vesting Date (or Trigger Date under Section 6.C), the Participant (or theParticipant’s estate under Section 6.C) may elect to receive up to 50% of the after-tax value of the aggregate number of sharesof Common Stock earned on such Normal Vesting Date (or Trigger Date) in cash, with the remainder paid in shares of CommonStock. Example:•following the calculation of Valero’s performance against the Target Group for the two-year performance periodending December 31, 2019, it is determined that the Participant is entitled to receive 4,000 shares of Common Stockon the Normal Vesting Date occurring in January 2020 (the “2020 Normal Vesting Date”),•the 4,000 shares have an aggregate tax value of $300,000 (4,000 shares times an assumed $75 FMV per share onthe 2020 Normal Vesting Date), and the Participant has made a tax withholding election of 39.6%,•the after-tax value of the 4,000 shares of Common Stock awarded on the Normal Vesting Date is $181,200($300,000 times 60.4%),•the Participant may elect to receive up to $90,600 ($181,200 times 50%) in cash on the 2020 Normal Vesting Date.8.Plan Incorporated by Reference. The Plan is incorporated into this Agreement by this reference and is made a part hereof forall purposes. Capitalized terms not otherwise defined in this Agreement shall have the meaning specified in the Plan.9.No Assignment. This Agreement and the Participant’s interest in the Performance Shares granted by this Agreement are of apersonal nature, and, except as expressly permitted under the Plan, Participant’s rights with respect thereto may not be sold,mortgaged, pledged, assigned, transferred, conveyed or disposed of in any manner by Participant, except by an executor orbeneficiary pursuant to a will or pursuant to the laws of descent and distribution. Any such attempted sale, mortgage, pledge,assignment, transfer, conveyance or disposition is void, and Valero will not be bound thereby.Page 410.Integration. This Agreement constitutes the entire agreement of the parties relating to the transactions contemplated hereby, andsupersedes all provisions and concepts contained in all prior contracts or agreements between the Participant and Valero,including that certain Change of Control Severance Agreement (“COC Agreement”) between Participant and Valero. Foravoidance of doubt, Participant acknowledges that in the context of a Change of Control of Valero, the terms of this Agreementshall prevail over the terms of the COC Agreement with respect to the vesting of the Performance Shares granted under thisAgreement.11.Successors. This Agreement shall be binding upon any successors of Valero and upon the beneficiaries, legatees, heirs,administrators, executors, legal representatives, successors and permitted assigns of Participant.12.Code Section 409A. This Agreement is intended to comply, and shall be administered consistently in all respects, with Section409A of the Internal Revenue Code of 1986, as amended (the “Code”), and the regulations and additional guidancepromulgated thereunder to the extent applicable. Accordingly, Valero shall have the authority to take any action, or refrain fromtaking any action, with respect to this Agreement that is reasonably necessary to ensure compliance with Code Section 409A(provided that Valero shall choose the action that best preserves the value of payments and benefits provided to Participantunder this Agreement that is consistent with Code Section 409A), and the parties agree that this Agreement shall be interpretedin a manner that is consistent with Code Section 409A. In furtherance, but not in limitation of the foregoing:(a)in no event may Participant designate, directly or indirectly, the calendar year of any payment to be made hereunder;(b)to the extent the Participant is a “specified employee” within the meaning of Code Section 409A, payments, if any, thatconstitute a “deferral of compensation” under Code Section 409A and that would otherwise become due during the firstsix months following Participant’s termination of employment shall be delayed and all such delayed payments shall bepaid in full in the seventh month after such termination date, provided that the above delay shall not apply to anypayment that is excepted from coverage by Code Section 409A, such as a payment covered by the short-term deferralexception described in Treasury Regulations Section 1.409A-1(b)(4);(c)notwithstanding any other provision of this Agreement, a termination, resignation or retirement of Participant’semployment hereunder shall mean and be interpreted consistent with a “separation from service” within the meaning ofCode Section 409A;(d)terms defined in this section will have the meanings given such terms under Section 409A if and to the extent requiredto comply with Section 409A. Notwithstanding any other provision hereof, Valero makes no representations orwarranties and will have no liability to Participant or any other person if any provision of or payment under thisAgreement is determined to constitute deferred compensation subject to Section 409A but does not satisfy the conditionsof Section 409A.Page 5Executed effective as of the date first written above.VALERO ENERGY CORPORATIONby: ___________________________________Julia Rendon Reinhart,Vice President-Human Resources______________________________________[name of Participant]Page 6Exhibit AExample of Potential Payout of Dividend Equivalent Award in Shares of Common Stock(per Section 5 of the Agreement)Assumptions and Calculations (for illustration purposes only):1.Assume the Participant was granted 12,000 Performance Shares on November 1, 2017.2.Assume the Normal Vesting Date for the second segment of these Performance Shares is January 22, 2020. On that date 4,000 Performance Shares(12,000 / 3 = 4,000) vest with respect to the two-year Performance Period ending December 31, 2019.3.Assume the cumulative amount of dividends paid to holders of Common Stock during the Performance Period is $5.80 per share (determined asfollows).dividends paid in 1Q18 $0.702Q18 $0.703Q18 $0.704Q18 $0.701Q19 $0.752Q19 $0.753Q19 $0.754Q19 $0.75 $5.80 per share4.The “Target Dividend Equivalent Value” is $23,200.00 (4,000 Performance Shares vesting, multiplied by $5.80 accumulated dividends per share,equals $23,200.00).5.Valero’s TSR ranking for the Performance Period is determined (per Section 4.C.) to generate a payout of 142.9%.6.The Fair Market Value of the Common Stock on the vesting date is $72.00.7.Based on the foregoing, the total number of shares of Common Stock earned by the Participant on the vesting date is 6,177. The calculation isillustrated below.Section 4.C. 4,000 Performance Shares vesting x 142.9% multiply by TSR ranking payout percentage 5,716 Section 5. $23,200.00 Target Dividend Equivalent Value x 142.9% multiply by TSR ranking payout percentage $33,152.80 dividend equivalent based on segment performance / $72.00 divided by FMV per share 461 common shares earned for Dividend Equivalent Award (rounded up) 6,177 total common shares earned on vesting dateExhibit AExhibit BExample of Potential Payout in a Change of Control Context(per Section 6.C.(ii) of the Agreement)Assumptions and Calculations (for illustration purposes only):1.Assume the Participant was granted 15,000 Performance Shares on November 1, 2017.2.Assume Participant’s employment is terminated on June 30, 2018 as a result of a Change of Control.3.Per Section 6.C. of the Agreement, all Performance Periods for all segments (First Segment, Second Segment, Third Segment (See Section 3)) areshortened to end on June 30, 2018.4.As a result of the TSR calculations of Section 4.C., Valero is ranked in the 88.9 percentile for each shortened Performance Period, resulting in a200% payout of common shares in each instance.5.Payout of common shares to the Participant is prorated based on the Participant’s length of service during the original Performance Periods.First Segment calculation. 15,000 / 3 = 5,000 performance shares. 6 months of service in the 12-month Performance Period. 5,000 perf. shares x 200% payout 10,000 common shares x 6 / 12 = 5,000common shares Second Segment calculation. 15,000 / 3 = 5,000 performance shares. 6 months of service in the 24-month Performance Period. 5,000 perf. shares x 200% payout 10,000 common shares x 6 / 24 = 2,500common shares Third Segment calculation. 15,000 / 3 = 5,000 performance shares. 6 months of service in the 36-month Performance Period. 5,000 perf. shares x 200% payout 10,000 common shares x 6 / 36 = 1,667common shares Total payout 9,167common sharesExhibit BExhibit 12.01VALERO ENERGY CORPORATIONSTATEMENTS OF COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES(Millions of Dollars) Year Ended December 31, 2017 2016 2015 2014 2013 Earnings: Income from continuing operationsbefore income tax expense,excluding income from equityinvestees$3,198 $3,173 $5,962 $5,538 $3,951 Add: Fixed charges776 781 783 687 695 Amortization of capitalized interest43 40 37 35 31 Distributions from equity investees6 6 26 6 3 Less: Interest capitalized(71) (65) (71) (70) (118) Total earnings$3,952 $3,935 $6,737 $6,196 $4,562 Fixed charges: Interest and debt expense, netof capitalized interest$468 $446 $433 $397 $365 Interest capitalized71 65 71 70 118 Rental expense interest factor (a)237 270 279 220 212 Total fixed charges$776 $781 $783 $687 $695 Ratio of earnings to fixed charges5.1x 5.0x 8.6x 9.0x 6.6x__________(a)The interest portion of rental expense represents one-third of rents, which is deemed representative of the interest portion of rental expense.Exhibit 21.01Subsidiaries of Valero Energy Corporationas of February 14, 2018Name of Entity State of Incorporation/Organization CANADIAN ULTRAMAR COMPANY Nova ScotiaCOLONNADE TEXAS INSURANCE COMPANY, LLC TexasCOLONNADE VERMONT INSURANCE COMPANY VermontDIAMOND ALTERNATIVE ENERGY, LLC DelawareDIAMOND ALTERNATIVE ENERGY OF CANADA INC. CanadaDIAMOND GREEN DIESEL HOLDINGS LLC DelawareDIAMOND GREEN DIESEL LLC DelawareDIAMOND K RANCH LLC TexasDIAMOND OMEGA COMPANY, L.L.C. DelawareDIAMOND SHAMROCK REFINING COMPANY, L.P. DelawareDIAMOND UNIT INVESTMENTS, L.L.C. DelawareDSRM NATIONAL BANK U.S.A.ENTERPRISE CLAIMS MANAGEMENT, INC. TexasGOLDEN EAGLE ASSURANCE LIMITED British ColumbiaHAMMOND MAINLINE PIPELINE LLC DelawareHUNTWAY REFINING COMPANY DelawareMAINLINE PIPELINES LIMITED England and WalesMICHIGAN REDEVELOPMENT GP, LLC DelawareMICHIGAN REDEVELOPMENT, L.P. DelawareMRP PROPERTIES COMPANY, LLC MichiganNECHES RIVER HOLDING CORP. DelawareNORCO METHANOL, LLC DelawareOCEANIC TANKERS AGENCY LIMITED QuebecPARKWAY PIPELINE LLC DelawarePICKARD PLACE CONDOMINIUM ASSOCIATION MichiganPI DOCK FACILITIES LLC DelawarePORT ARTHUR COKER COMPANY L.P. DelawarePREMCOR USA INC. DelawarePROPERTY RESTORATION, L.P. DelawareSABINE RIVER HOLDING CORP. DelawareSABINE RIVER LLC DelawareSAINT BERNARD PROPERTIES COMPANY LLC DelawareSUNBELT REFINING COMPANY, L.P. DelawareTHE PREMCOR PIPELINE CO. DelawareTHE PREMCOR REFINING GROUP INC. DelawareTHE SHAMROCK PIPE LINE CORPORATION DelawareTRANSPORT MARITIME ST. LAURENT INC. QuebecULTRAMAR ACCEPTANCE INC. CanadaULTRAMAR ENERGY INC. DelawareULTRAMAR INC. NevadaV-TEX LOGISTICS LLC DelawareVALERO ADMINISTRATIVE SERVICES DE MÉXICO, S.A. DE C.V. MexicoVALERO ARUBA ACQUISITION COMPANY I, LTD. Virgin Islands (U.K.)VALERO ARUBA FINANCE INTERNATIONAL, LTD. Virgin Islands (U.K.)VALERO ARUBA HOLDING COMPANY N.V. ArubaVALERO ARUBA HOLDINGS INTERNATIONAL, LTD. Virgin Islands (U.K.)VALERO ARUBA MAINTENANCE/OPERATIONS COMPANY N.V. ArubaVALERO (BARBADOS) SRL BarbadosVALERO BROWNSVILLE TERMINAL LLC TexasVALERO CANADA FINANCE, INC. DelawareVALERO CANADA L.P. NewfoundlandVALERO CAPITAL CORPORATION DelawareVALERO CARIBBEAN SERVICES COMPANY DelawareVALERO COKER CORPORATION ARUBA N.V. ArubaVALERO CUSTOMS & TRADE SERVICES, INC. DelawareVALERO EAST BAY LLC DelawareVALERO ENERGY ARUBA II COMPANY Cayman IslandsVALERO ENERGY INC. CanadaVALERO ENERGY (IRELAND) LIMITED IrelandVALERO ENERGY LTD England and WalesVALERO ENERGY PARTNERS GP LLC DelawareVALERO ENERGY PARTNERS LP DelawareVALERO ENERGY UK LTD England and WalesVALERO ENTERPRISES, INC. DelawareVALERO EQUITY SERVICES LTD England and WalesVALERO FINANCE L.P. I NewfoundlandVALERO FINANCE L.P. II NewfoundlandVALERO FINANCE L.P. III NewfoundlandVALERO GRAIN MARKETING, LLC TexasVALERO H2 PIPELINE COMPANY LLC DelawareVALERO HOLDCO UK LTD United KingdomVALERO HOLDINGS, INC. DelawareVALERO INTERNATIONAL HOLDINGS, INC. NevadaVALERO LIVE OAK LLC TexasVALERO LOGISTICS UK LTD England and WalesVALERO MARKETING AND SUPPLY COMPANY DelawareVALERO MARKETING AND SUPPLY DE MÉXICO S.A. DE C.V. MexicoVALERO MARKETING AND SUPPY INTERNATIONAL LTD. Cayman IslandsVALERO MARKETING AND SUPPLY (PANAMA) LLC DelawareVALERO MARKETING IRELAND LIMITED IrelandVALERO MKS LOGISTICS, L.L.C. DelawareVALERO NEDERLAND COÖPERATIEF U.A. The NetherlandsVALERO NEW AMSTERDAM B.V. The NetherlandsVALERO OMEGA COMPANY, L.L.C. DelawareVALERO OPERATIONAL SERVICES DE MÉXICO, S.A. DE C.V. MexicoVALERO OPERATIONS SUPPORT, LTD England and WalesVALERO PARTNERS CCTS, LLC DelawareVALERO PARTNERS CORPUS EAST, LLC DelawareVALERO PARTNERS CORPUS WEST, LLC DelawareVALERO PARTNERS EP, LLC DelawareVALERO PARTNERS HOUSTON, LLC DelawareVALERO PARTNERS LOUISIANA, LLC DelawareVALERO PARTNERS LUCAS, LLC DelawareVALERO PARTNERS MCKEE, LLC DelawareVALERO PARTNERS MEMPHIS, LLC DelawareVALERO PARTNERS MERAUX, LLC DelawareVALERO PARTNERS NORTH TEXAS, LLC DelawareVALERO PARTNERS OPERATING CO. LLC DelawareVALERO PARTNERS PAPS, LLC DelawareVALERO PARTNERS PORT ARTHUR, LLC DelawareVALERO PARTNERS SOUTH TEXAS, LLC DelawareVALERO PARTNERS TEXAS CITY, LLC DelawareVALERO PARTNERS THREE RIVERS, LLC DelawareVALERO PARTNERS WEST MEMPHIS, LLC DelawareVALERO PARTNERS WEST TEXAS, LLC DelawareVALERO PARTNERS WYNNEWOOD, LLC DelawareVALERO PAYMENT SERVICES COMPANY VirginiaVALERO PEMBROKESHIRE LLC DelawareVALERO PLAINS COMPANY LLC TexasVALERO POWER MARKETING LLC DelawareVALERO RAIL OPERATIONS DE MÉXICO, S.A. DE C.V. MexicoVALERO RAIL PARTNERS, LLC DelawareVALERO REFINING AND MARKETING COMPANY DelawareVALERO REFINING COMPANY-ARUBA N.V. ArubaVALERO REFINING COMPANY-CALIFORNIA DelawareVALERO REFINING COMPANY-OKLAHOMA MichiganVALERO REFINING COMPANY-TENNESSEE, L.L.C. DelawareVALERO REFINING-MERAUX LLC DelawareVALERO REFINING-NEW ORLEANS, L.L.C. DelawareVALERO REFINING-TEXAS, L.P. TexasVALERO RENEWABLE FUELS COMPANY, LLC TexasVALERO SECURITY SYSTEMS, INC. DelawareVALERO SERVICES, INC. DelawareVALERO SKELLYTOWN PIPELINE, LLC DelawareVALERO TEJAS COMPANY LLC DelawareVALERO TERMINALING AND DISTRIBUTION COMPANY DelawareVALERO TERMINALING AND DISTRIBUTION DE MEXICO, S.A. DE C.V. MexicoVALERO TEXAS POWER MARKETING, INC. DelawareVALERO ULTRAMAR HOLDINGS INC. DelawareVALERO UNIT INVESTMENTS, L.L.C. DelawareVALERO WEST WALES LLC DelawareVRG PROPERTIES COMPANY DelawareVTD PROPERTIES COMPANY DelawareWARSHALL COMPANY LLC DelawareExhibit 23.01Consent of Independent Registered Public Accounting FirmThe board of directorsValero Energy Corporation and subsidiaries:We consent to the incorporation by reference in the registration statements, as amended, on Form S-3 (Registration No. 333-202635)and Form S-8 (Registration Nos. 333-81858, 333-106620, 333-129032, 333-136333, 333-174721, and 333-205756) of Valero EnergyCorporation and subsidiaries of our reports dated February 28, 2018, with respect to the consolidated balance sheets of Valero EnergyCorporation and subsidiaries as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensiveincome, equity, and cash flows for each of the years in the three-year period ended December 31, 2017, and the related notes(collectively, the “consolidated financial statements”), and the effectiveness of internal control over financial reporting as ofDecember 31, 2017, which reports appear in the December 31, 2017 annual report on Form 10‑K of Valero Energy Corporation andsubsidiaries./s/ KPMG LLPSan Antonio, TexasFebruary 28, 2018Exhibit 31.01CERTIFICATION PURSUANT TO SECTION 302OF THE SARBANES-OXLEY ACT OF 2002I, Joseph W. Gorder, certify that:1. I have reviewed this annual report on Form 10-K of Valero Energy Corporation;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respectsthe financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrant and have:(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by otherswithin those entities, particularly during the period in which this report is being prepared;(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed underour supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles;(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’smost recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the registrant’s internal control over financial reporting; and5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, tothe registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’sinternal control over financial reporting.Date: February 28, 2018/s/ Joseph W. Gorder Joseph W. GorderChief Executive Officer and President Exhibit 31.02CERTIFICATION PURSUANT TO SECTION 302OF THE SARBANES-OXLEY ACT OF 2002I, Michael S. Ciskowski, certify that:1. I have reviewed this annual report on Form 10-K of Valero Energy Corporation;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respectsthe financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrant and have:(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by otherswithin those entities, particularly during the period in which this report is being prepared;(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed underour supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles;(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’smost recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the registrant’s internal control over financial reporting; and5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, tothe registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’sinternal control over financial reporting.Date: February 28, 2018/s/ Michael S. Ciskowski Michael S. CiskowskiExecutive Vice President and Chief Financial Officer Exhibit 32.01CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report of Valero Energy Corporation (the Company) on Form 10-K for the year ended December 31,2017, as filed with the Securities and Exchange Commission on the date hereof (the Report), the undersigned hereby certifies, pursuantto 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:1.The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and2.The information contained in the Report fairly presents, in all material respects, the financial condition and results ofoperations of the Company./s/ Joseph W. Gorder Joseph W. Gorder Chief Executive Officer and President February 28, 2018 A signed original of the written statement required by Section 906 has been provided to Valero Energy Corporation and will be retained by Valero EnergyCorporation and furnished to the Securities and Exchange Commission or its staff upon request.CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report of Valero Energy Corporation (the Company) on Form 10-K for the year ended December 31,2017, as filed with the Securities and Exchange Commission on the date hereof (the Report), the undersigned hereby certifies, pursuantto 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:1.The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and2.The information contained in the Report fairly presents, in all material respects, the financial condition and results ofoperations of the Company./s/ Michael S. Ciskowski Michael S. Ciskowski Executive Vice President and Chief Financial OfficerFebruary 28, 2018 A signed original of the written statement required by Section 906 has been provided to Valero Energy Corporation and will be retained by Valero EnergyCorporation and furnished to the Securities and Exchange Commission or its staff upon request.Exhibit 99.01VALERO ENERGY CORPORATIONAudit Committee Pre-Approval PolicyI. Statement of PrinciplesPursuant to Section 10A of the Securities Exchange Act of 1934, as amended by Section 202 of the Sarbanes-Oxley Act of 2002(“SOX Act”), the Audit Committee of the board of directors (the “Audit Committee”) of Valero Energy Corporation (the“Company”) is required to pre-approve the audit and non-audit services performed by the Company’s independent auditor toassure that the provision of such services does not impair the auditor’s independence. The SEC’s rules establish two approaches forpre-approving services. The two approaches are not mutually exclusive:•the Audit Committee may pre-approve each particular service on a case-by-case basis (“separate pre-approval”), and•the Audit Committee may adopt a pre-approval policy that is detailed as to the particular types of services that may beprovided by the independent auditor without consideration by the Audit Committee on a case-by-case basis (“policy-basedpre-approval”).The Audit Committee believes that a combination of these approaches will provide an effective and efficient procedure to pre-approve services performed by the independent auditor. Therefore, unless a type of service has received policy-based pre-approval(as specifically identified in the appendices to this policy), it will require separate pre-approval by the Audit Committee.The appendices to this policy contain lists of services that have received policy-based pre-approval of this Audit Committee in thefollowing categories (categorized in accordance with the SEC’s rules):•Audit Services•Audit-Related Services•Tax Services•All Other ServicesII. Term of Pre-ApprovalsThe term of the policy-based pre-approvals stated in the appendices to this policy is the period from January 1, 2018 to January 31,2021, unless the Audit Committee specifically provides for a different period. The Audit Committee will review and pre-approvethe services that may be provided by the independent auditor. The Audit Committee will revise the list of policy-based pre-approved services from time to time as the Committee deems necessary or appropriate.Page 1III. DelegationIn accordance with the SOX Act and SEC rules, the Audit Committee hereby delegates to its Chairman the authority to grantseparate pre-approvals of services and fees in accordance with this policy. The Audit Committee may further delegate pre-approvalauthority from time to time to one or more of its other members in its discretion. Any committee member to whom pre-approvalauthority is delegated shall report any pre-approval decisions to the full Audit Committee at its next meeting. The Audit Committeedoes not delegate its responsibilities to pre-approve services to any member of the Company’s management.The Audit Committee recognizes that the Company’s independent auditor provides and may provide services to Valero EnergyPartners LP and/or any one or more of its consolidated subsidiaries (the “Partnership”). The Audit Committee acknowledges thatthe audit committee of the board of directors of Valero Energy Partners GP LLC (the “VLP Audit Committee”) approves, pursuantto the terms of the Valero Energy Partners GP LLC Audit Committee Pre-Approval Policy (the “VLP Policy”), the services of thePartnership’s independent auditor when those services are rendered for or at the request of the Partnership. This Audit Committeehereby delegates to the VLP Audit Committee the authority of this Audit Committee to approve and/or pre-approve—to the extentrequired or recommended by statute, regulation, policy, or guidance—all services of the Partnership’s independent auditor whenthe services are rendered to or for the Partnership, provided that such approval by the VLP Audit Committee is made in accordancewith the terms of the VLP Policy, as that policy may be in effect from time to time.IV. Services for which Separate Pre-Approval is RequiredThe terms and fees for the following services of the independent auditor require separate pre-approval by the Audit Committee:•the annual financial statement audit, including all audits, reviews, procedures and other services required to be performed bythe independent auditor to form an opinion on the Company’s consolidated financial statements, and•the annual audit of the Company’s internal control over financial reporting, including all services required to be performedby the independent auditor to issue its report on the effectiveness of the Company’s internal control over financial reporting.The Audit Committee will monitor these engagements as it deems appropriate, and will approve, if necessary, any changes interms, conditions and fees resulting from changes in engagement scope, changes in the Company’s structure or other matters.V. Services for which Policy-Based Pre-Approval is AvailableA. Audit ServicesThe Audit Committee may grant policy-based pre-approval for Audit Services other than the services described in Section IVabove. These Audit Services are generally services that only the Company’s independent auditor reasonably can provide, andinclude:Page 2•services associated with SEC registration statements (e.g., comfort letters, consents), periodic reports and otherdocuments filed with the SEC or other documents issued in connection with securities offerings,•statutory audits or financial audits for subsidiaries or affiliates of the Company.The Audit Committee has given policy-based pre-approval for the Audit Services listed in Appendix A. All other AuditServices must be separately pre-approved by the Audit Committee.B. Audit-Related ServicesAudit-Related Services are assurance and related services that are reasonably related to the performance of the annual audit orquarterly review of the Company’s financial statements or that are traditionally performed by the independent auditor. TheAudit Committee may grant policy-based pre-approval for Audit-Related Services. These services would include:•employee benefit plan audits, and•due diligence services related to proposed mergers and acquisitions.The Audit Committee believes that the provision of the Audit-Related Services listed in Appendix B does not impair theindependence of the auditor, and has given policy-based pre-approval for the Audit-Related Services listed in Appendix B. Allother Audit-Related Services must be separately pre-approved by the Audit Committee.C. Tax ServicesThe Audit Committee believes that the independent auditor can provide Tax Services to the Company such as tax compliance,tax planning and tax advice without impairing the auditor’s independence. However, the Audit Committee will not permit theretention of the independent auditor in connection with a transaction initially recommended by the independent auditor, thepurpose of which may be tax avoidance and the tax treatment of which may not be supported in the U.S. Internal RevenueCode and related regulations or in the tax laws and regulations of any jurisdiction in which the Company is subject to taxation.In addition, the independent auditor may not provide any tax services to the Company that are deemed to be incompatible withauditor independence per standards promulgated by the Public Company Accounting Oversight Board (“PCAOB”).The Audit Committee has given policy-based pre-approval for the Tax Services listed in Appendix C. All other Tax Servicesmust be separately pre-approved by the Audit Committee, including Tax Services related to large and complex transactionsand Tax Services proposed to be provided by the independent auditor to any executive officer or director of the Company, inhis or her individual capacity, when such services are paid for by the Company.Page 3D. All Other ServicesThe Audit Committee may grant policy-based pre-approval for those permissible non-audit services classified as All OtherServices that it believes are routine, recurring services that would not impair the independence of the auditor. The AuditCommittee has given policy-based pre-approval for the All Other Services listed in Appendix D. Any permissible All OtherServices that are not listed in Appendix D must be separately pre-approved by the Audit Committee.VI. Prohibited ServicesA list of the SEC’s prohibited non-audit services is attached to this policy as Appendix E. The list sets forth the several services thatthe SOX Act and the SEC have specifically identified as services that may not be performed by the Company’s independentauditor. The Audit Committee will consult the SEC’s rules and relevant guidance, with the assistance of counsel when necessary orappropriate, to determine whether any proposed service by the independent auditor falls within any category of prohibited non-audit services.In addition, the independent auditor may not provide any service or product to the Company for a contingent fee (as defined andinterpreted by the SEC pursuant to Rule 2-01(c)(5) of Regulation S-X) or a commission, or pursuant to an agreement (written orotherwise) by the Company to pay a “value added” fee based on the results of the independent auditor’s performance of a service.VII. Pre-Approval Fee LevelsPre-approval fee levels for all services to be provided by the independent auditor have been established by the Audit Committee.All services that have received policy-based pre-approval are subject to the annual pre-approval fee levels set forth in theappendices to this policy. Any proposed services exceeding these amounts will require separate pre-approval by the AuditCommittee or by any person to whom pre-approval authority is granted under Section III above. Unused pre-approval amountsfrom one year may not be carried forward to the next year.VIII. ProceduresRequests or applications to provide services that require separate approval by the Audit Committee must be submitted to the AuditCommittee by both the independent auditor and the Company’s Chief Financial Officer (or his designee), and must be consistentwith the SEC’s rules on auditor independence. In connection with the Audit Committee’s consideration of any proposed service,the independent auditor, at the Committee’s request, will provide to the Audit Committee detailed documentation regarding thespecific services to be provided so that the Committee can make a well-reasoned assessment of the impact of the service on theauditor’s independence.The Audit Committee hereby designates the Company’s Vice President of Internal Audit (the “Monitor”) to monitor theperformance of all services provided by the independent auditor and to determine whether such services are in compliance withthis policy. The Monitor will report to the Audit Committee on a periodic basis the results of his monitoring.Page 4Appendix APre-Approved AUDIT SERVICESServiceassistance with and review of documents filed with the SEC including registration statements, reports on Forms 10-K and 10-Q,and other documentsservices associated with other documents issued in connection with securities offerings (e.g., comfort letters, consents)assistance in responding to SEC comment lettersstatutory audits (e.g., FERC and insurance audits) and financial audits for subsidiaries of the Company, to include servicesnormally provided by the Company’s independent auditor in connection with statutory and regulatory filingscertificates, letters and opinions issued to regulators, agencies and other third-parties (e.g., insurance, banking, environmental)regarding the Company’s assets and/or operations that only the Company’s independent auditors reasonably can provideconsultations concerning principles of accounting and/or financial reporting treatment under standards or interpretations by theSEC, PCAOB, FASB or other regulatory or standard-setting bodies necessary to reach an audit judgment and/or opinion on theCompany’s financial statementsAnnual pre-approval fee limit for Audit Services (other than services pertaining to registration statements or prospectuses inconnection with securities offerings)$1,000,000Annual pre-approval fee limit for Audit Services pertaining to registration statements or prospectuses in connection withsecurities offerings$250,000 per registration statement or prospectusAppendix BPre-Approved AUDIT-RELATED SERVICESServicedue diligence services pertaining to potential business acquisitions or dispositionsfinancial statement audits of employee benefit plansaccounting consultations and audits in connection with acquisitionsconsultations concerning principles of accounting and/or financial reporting treatment under standards or interpretations by theSEC, PCAOB, FASB or other regulatory or standard-setting bodies outside those consultations necessary to perform an audit orreview of Valero’s financial statements in accordance with generally accepted auditing standards Annual pre-approval fee limit for Audit-Related Services$500,000Appendix CPre-Approved TAX SERVICESService Note: The following are subject to the terms of subsection C. of Section V. of this policy.U.S. federal, state and local tax compliance, including the preparation of original and amended tax returns and claims for refundsU.S. federal, state and local tax planning and advice, including assistance with tax audits and appeals (but expressly excludingadvocacy or litigation services), tax advice related to mergers and acquisitions, tax advice relating to employee benefit plans, andrequests for rulings or technical advice from taxing authoritiesreview of Canadian federal and provincial income tax returnsCanadian federal and provincial tax planning and advice, including assistance with tax audits and appeals (but expressly excludingadvocacy or litigation services), and advice relating to the tax effects of certain employee benefit arrangementsreview of federal, state, local and international income, franchise, and other tax returns Annual pre-approval fee limit for Tax Services$250,000Appendix DPre-Approved ALL OTHER SERVICESServicesPermissible non-audit services that would not impair the independence of the auditor. Expressly excluded from this pre-approvalare the prohibited non-audit services listed on Appendix E of this policy. Annual pre-approval fee limit for All Other Services$ 150,000Appendix EProhibited Non-Audit Services•Bookkeeping or other services related to the accounting records or financial statements of the audit client*•Financial information systems design and implementation*•Appraisal or valuation services, fairness opinions or contribution-in-kind reports*•Actuarial services*•Internal audit outsourcing services*•Management functions•Human resources•Broker-dealer, investment adviser or investment banking services•Legal services•Expert services unrelated to the audit____________________*Provision of these non-audit services may be permitted if it is reasonable to conclude that the results of these services will not be subject to auditprocedures. Materiality is not an appropriate basis upon which to overcome the rebuttable presumption that prohibited services will be subject to auditprocedures.

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