Valero Energy Annual Report 2018

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, 2018ORoTRANSITION 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 every Interactive Data File required to be submitted pursuant to Rule 405 ofRegulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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. oIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 $47.5 billion based on the last sales pricequoted as of June 29, 2018 on the New York Stock Exchange, the last business day of the registrant’s most recently completed second fiscal quarter.As of January 31, 2019, 417,614,487 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 April 30,2019, at which directors will be elected. Portions of the 2019 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 2019 Proxy Statement where certain information required in Part III of this Form 10-Kmay be found.Form 10-K ItemNo. and Caption Heading in 2019 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 Overview1 Available Information1 Valero’s Operations2 Environmental Matters13 Properties13Item 1A.Risk Factors14Item 1B.Unresolved Staff Comments21Item 3.Legal Proceedings21Item 4.Mine Safety Disclosures22 PART II 22Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities22Item 6.Selected Financial Data24Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations25Item 7A.Quantitative and Qualitative Disclosures About Market Risk60Item 8.Financial Statements and Supplementary Data62Item 9.Changes in and Disagreements with Accountants on Accounting andFinancial Disclosure139Item 9A.Controls and Procedures139Item 9B.Other Information139 PART III 139Item 10.Directors, Executive Officers and Corporate Governance139Item 11.Executive Compensation139Item 12.Security Ownership of Certain Beneficial Owners and Management andRelated Stockholder Matters139Item 13.Certain Relationships and Related Transactions, and Director Independence139Item 14.Principal Accountant Fees and Services139 PART IV 140Item 15.Exhibits and Financial Statement Schedules140 Signature 144 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 itsconsolidated 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 25 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 trading symbol “VLO.” On January 31, 2019, we had 10,261 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 (BPD). Our refineries produce conventional gasolines, premiumgasolines, gasoline meeting the specifications of the California Air Resources Board (CARB), diesel, low-sulfur diesel, ultra-low-sulfurdiesel, CARB diesel, other distillates, jet fuel, asphalt, petrochemicals, lubricants, and other refined petroleum products. We sell ourrefined petroleum products in both the wholesale rack and bulk markets, and approximately 7,000 outlets carry our brand names in theU.S., Canada, the U.K., and Ireland. We also own 14 ethanol plants in the Mid-Continent region of the U.S. with a combinedproduction capacity of approximately 1.73 billion gallons per year. We sell our ethanol in the wholesale bulk market.On January 10, 2019, we completed our acquisition of all of the outstanding publicly held common units of Valero Energy Partners LP(VLP) as described in Note 2 of Notes to Consolidated Financial Statements, which is incorporated herein by reference.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, current reports on Form 8-K, and other reports, as well as any amendments to those reports, filed with(or furnished to) the U.S. Securities and Exchange Commission (SEC) are available on our website (under “Investors”) free of charge,soon after we file or furnish such material. In this same location, we also post our corporate governance guidelines and othergovernance policies, codes of ethics, and the charters of the committees of our board of directors. These documents are available inprint to any stockholder that makes a written request to Valero Energy Corporation, Attn: Secretary, P.O. Box 696000, San Antonio,Texas 78269-6000.1Table of ContentsVALERO’S OPERATIONSAs of December 31, 2018, we had 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 operations of VLP, which is a limited partnership that owns logistics assets that provide transportationand terminaling services to our refining segment.Financial information about these segments is presented in Note 17 of Notes to Consolidated Financial Statements, which isincorporated herein by reference.Effective January 1, 2019, 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 — renewable diesel — because ofthe growing importance of renewable fuels in the market and the growth of our investments in renewable fuels production. Therenewable diesel segment includes the operations of Diamond Green Diesel Holdings LLC (DGD), our consolidated joint venture asdiscussed in Note 12 of Notes to Consolidated Financial Statements. The operations of DGD have been included in the refining segmentthrough December 31, 2018, but were transferred from that segment on January 1, 2019. Also effective January 1, 2019, we no longerhave a VLP segment, and we include the operations of VLP in our refining segment. This change was made because of the MergerTransaction with VLP, as defined and discussed in Note 2 of Notes to Consolidated Financial Statements, and the resulting change inhow we manage VLP’s operations. We no longer manage VLP as a business but as logistics assets that support the operations of ourrefining segment.2Table of ContentsREFININGRefining OperationsAs of December 31, 2018, 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 BPD. The following table presents the locations of these refineries and theirapproximate feedstock throughput capacities as of December 31, 2018.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 250,000Meraux Louisiana 135,000Three Rivers Texas 100,000 1,850,000 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 3,145,000________________________(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 2018,during which period our total combined throughput volumes averaged approximately 3.0 million BPD.Combined Total Refining System Charges and YieldsCharges: sour crude oil30% sweet crude oil47% residual fuel oil8% other feedstocks4% blendstocks11%Yields: gasolines and blendstocks48% distillates37% other products (primarily includes petrochemicals,gas oils, No. 6 fuel oil, petroleum coke, sulfurand asphalt)15%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 2018, during which period total throughput volumes averaged approximately 1.8 million BPD.Combined U.S. Gulf Coast Region Charges and YieldsCharges: sour crude oil40% sweet crude oil33% residual fuel oil11% other feedstocks5% blendstocks11%Yields: gasolines and blendstocks45% distillates38% other products (primarily includes petrochemicals,gas oils, No. 6 fuel oil, petroleum coke, sulfurand asphalt)17%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 and 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 and barge via deepwater docking facilities along the Corpus ChristiShip Channel, and West Texas or South Texas crude oil is delivered via pipelines. The refineries’ physical locations allow for thetransfer4Table 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 and 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 are shipped over these docks and through our Parkway pipeline and theBengal pipeline, which ultimately provide access to the Plantation and Colonial pipeline networks.Texas City Refinery. Our Texas City Refinery is located southeast of Houston on the Houston 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 Houston Ship Channel. The refinery uses ships and barges, as well as the Colonial, Explorer, and other pipelines fordistribution 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 and barges at deepwater docking facilities along theHouston Ship 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 are shipped from the refinery’s dock and 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 sweetcrude oils into gasoline, distillates, and aromatics. The refinery has access to crude oil from West Texas and South Texas through third-party pipelines and trucks. The refinery distributes 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 2018, during which period total throughput volumes averaged approximately 466,000 BPD.Combined U.S. Mid-Continent Region Charges and YieldsCharges: sour crude oil1% sweet crude oil91% blendstocks8%Yields: gasolines and blendstocks55% distillates36% other products (primarily includes petrochemicals,gas oils, No. 6 fuel oil, and asphalt)9%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. Refined petroleumproducts are transported primarily via third-party pipelines and rail to markets in Texas, New Mexico, Arizona, Colorado, Oklahoma,and Mexico.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, Oklahoma over the Diamondpipeline, which began operations in November 2017. Crude oil can be received, along with other feedstocks, via barge. Most of therefinery’s products are distributed via truck rack and barges.Ardmore Refinery. Our Ardmore Refinery is located in Oklahoma, approximately 100 miles south of Oklahoma City. It processes sourand sweet crude oils into gasoline, diesel, and asphalt. The refinery predominantly receives Permian Basin and Cushing-sourced crudeoil via third-party pipelines. Refined petroleum products are transported via rail, trucks, and the Magellan pipeline system.North AtlanticThe following table presents the percentages of principal charges and yields (on a combined basis) for the two refineries in the NorthAtlantic region for 2018, during which period total throughput volumes averaged approximately 466,000 BPD.Combined North Atlantic Region Charges and YieldsCharges: sweet crude oil81% residual fuel oil7% blendstocks12%Yields: gasoline and blendstocks45% distillates42% other products (primarily includespetrochemicals, gas oils, and No. 6 fuel oil)13%6Table of ContentsPembroke 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 some of its products by ship and barge via deepwater docking facilities along the Milford Haven Waterway, with itsremaining products being delivered through 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 and by pipeline and 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 2018, during which period total throughput volumes averaged approximately 282,000 BPD.Combined U.S. West Coast Region Charges and YieldsCharges: sour crude oil66% sweet crude oil9% other feedstocks12% blendstocks13%Yields: gasolines and blendstocks60% distillates26% other products (primarily includes gas oil, No. 6fuel oil, petroleum coke, sulfur and asphalt)14%Benicia 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 CARB specifications when blended with ethanol. The refinery receives crude oilfeedstocks via a marine dock and crude oil pipelines connected to a southern California crude oil delivery system. Most of therefinery’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 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 ofthe7Table of Contentscurrent 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.,Ireland, and Latin America through our operations in Peru and Mexico.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 5,335 branded sites in the U.S., 907 branded sites in the U.K. and Ireland, and 792 brandedsites in Canada as of December 31, 2018. 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 to various oil companies, traders, and bulk end-users,such as railroads, airlines, and utilities. Our bulk sales are transported primarily by pipeline, barges, and tankers to major tank farms andtrading 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 onpage 10.8Table of ContentsETHANOLWe own 14 ethanol plants with a combined ethanol production capacity of 1.73 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 also export our ethanol into the global markets. We ship our drydistillers grains (DDGs) by truck or rail primarily to animal feed customers in the U.S. and Mexico. We also sell modified distillersgrains locally at our plant sites, and corn oil by truck and rail. We distribute our ethanol through logistics assets, which include railcarsowned 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 annual corn processing capacities (in millions of bushels).State City EthanolProductionCapacity Productionof DDGs CornProcessedIndiana Bluffton(c) 115 302,000 40 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 49 Lakota(c) 110 289,000 38Michigan Riga(c) 55 145,000 19Minnesota 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 1,730 4,611,000 606The combined production of ethanol from our plants averaged 4.1 million gallons per day for 2018.________________________(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, andstarch) prior to fermentation. In the dry mill process, the entire grain kernel is ground into flour. The starch in the flour is converted 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) areconcentrated to yield corn oil, modified distillers grains, or, after further drying, dried distillers grains. Distillers grains generally are an economical partial replacement for cornand soybeans in feeds for cattle, swine, and poultry. Corn oil is produced as fuel grade and feed grade (not for human consumption), and is sold primarily as a feedstock forbiodiesel or renewable diesel production with a smaller percentage sold into animal feed markets.(c)The Bluffton, Lakota, and Riga plants were acquired from two subsidiaries of Green Plains Inc. in November 2018. The annual ethanol, DDG production, and corn processingcapacities for these ethanol plants were only applicable for November and December of 2018.9Table of ContentsVLPVLP is a limited partnership that owns and operates crude oil and refined petroleum products pipeline and terminal systems in theU.S. Gulf Coast and U.S. Mid-Continent regions that provide transportation and terminaling services to our refining segment and areintegral to the operations of our Ardmore, Corpus Christi East and West, Houston, McKee, Memphis, Meraux, Port Arthur, St. Charles,and Three Rivers Refineries.The 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 pipelinesystem 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____________________________See notes on page 12.10Table 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 (f) — refined petroleumproducts McKee Kinder MorganSFPP SystemEl Paso terminal truck rack — 10 (g) 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 (h) 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 notes on page 12.11Table 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; ColonialDiamond Green Diesel tank 180 renewable diesel n/a n/aThree 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 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.(f)Capacity shown represents VLP’s 33⅓ percent undivided interest in the terminal. Total storage capacity is 499,000 barrels.(g)Capacity shown represents VLP’s 33⅓ percent undivided interest in the truck rack. Total capacity is 30,000 BPD.(h)Dock throughput is reflected in thousands of barrels per hour.12Table 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 8 of Notes to Consolidated Financial Statements andNote 10 of Notes to Consolidated Financial Statements under the caption “Environmental Matters.”Capital Expenditures Attributable to Compliance with Environmental Regulations. In 2018, our capital expenditures attributable tocompliance with environmental regulations were $270 million, and they are currently estimated to be $170 million for 2019 and$15 million for 2020. The estimates for 2019 and 2020 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, 2018, we were the lessee under a number of cancelable and noncancelable leases for certainproperties. Our leases are discussed in Notes 9 and 10 of Notes to Consolidated Financial Statements. Financial information about ourproperties is presented in Note 6 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 refined petroleum products are integral to our wholesale rack marketing operations.13Table 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,14Table 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 International Maritime Organization (IMO) will be implementing a new regulation for a global sulphur cap for marinebunker fuels by the year 2020 (IMO 2020). Under the IMO 2020 cap, vessels will be required to use marine fuels with a sulphurcontent of no more than 0.50 percent beginning in January 2020, versus the current sulphur limit of 3.50 percent. While there are manyuncertainties, IMO 2020 could affect our business by creating the continued need for new and updated process units necessary toproduce the low sulphur marine fuel, and could increase the costs of our products.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, under the agreement’s terms the earliest the U.S. can withdraw is 2020. There are no guarantees that the agreement will not be re-implemented in the U.S., or re-implemented in part by specific U.S. states or local governments. However, the Paris Agreement couldstill affect our operations in Canada, the U.K., Ireland, and Latin America. Restrictions on emissions of methane or carbon dioxide thathave been or may be imposed in various U.S. states, at the U.S. federal level, or in other countries could adversely affect the oil and gasindustry.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.Compliance with the U.S. Environmental Protection Agency Renewable Fuel Standard could adversely affect our performance.The U.S. Environmental Protection Agency (EPA) has implemented a Renewable Fuel Standard (RFS) pursuant to the Energy PolicyAct of 2005 and the Energy Independence and Security Act of 2007. The RFS program sets annual quotas for the quantity of renewablefuels (such as ethanol) that must be blended into15Table of Contentstransportation fuels consumed in the U.S. A Renewable Identification Number (RIN) is assigned to each gallon of renewable fuelproduced in or imported into the U.S. As a producer of petroleum-based transportation fuels, we are obligated to blend renewable fuelsinto the products we produce at a rate that is at least commensurate to the U.S. EPA’s quota and, to the extent we do not, we mustpurchase 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. For example, the administration haswithdrawn the U.S. from the Trans-Pacific Partnership, and has indicated that the administration may withdraw the U.S. from the NorthAmerican Free Trade Agreement (NAFTA) in order to encourage the U.S. Congress to vote on ratification of the United States-Mexico-Canada Agreement (USMCA), which was signed in November 2018 and is intended to be the successor to NAFTA. In addition, theadministration has implemented and proposed various trade tariffs, which have resulted in foreign governments responding with tariffson U.S. goods.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, existing international trade agreements, our business, financialcondition and results of operations could be adversely affected.16Table of ContentsWe 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 use the services of third parties to transport feedstocks to our facilities and to transport the products we manufacture to market. If weexperience prolonged interruptions of supply or increases in costs to deliver our products to market, or if the ability of the pipelines,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 financial position, results ofoperations, 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 the past several years, the Department of Transportation, thePipeline and Hazardous Materials Safety Administration, and the Federal Railroad Administration have issued orders and rules, pursuantto the Rail Safety Improvement Act of 2008, Fixing America’s Surface Transportation Act of 2015 and other statutory authorities,concerning such matters as enhanced tank car standards, operational controls, safety training programs, and notification requirements.While some recent actions have provided some regulatory relief, the general trend has been toward greater regulation. We do notbelieve these orders and rules will have a material impact on our financial position, results of operations, and liquidity, although furtherchanges in law, regulations or industry standards could require us to incur additional 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.Some 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 may17Table of Contentsbe adversely impacted by unstable or illiquid market conditions. Protracted uncertainty and illiquidity in these markets also could havean adverse impact on our lenders, commodity hedging counterparties, or our customers, causing them to fail to meet their obligations tous. In addition, decreased returns on pension fund assets may also materially increase our pension funding 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 in the financial and insurance markets, making itmore difficult for us to access capital and to obtain insurance coverage that we consider adequate.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(i) a loss of intellectual property, proprietary information, or employee, customer or vendor data; (ii) public disclosure of sensitiveinformation; (iii) increased costs to prevent, respond to, or mitigate cybersecurity events, such as deploying additional personnel andprotection technologies, training employees, and engaging third-party experts and consultants; (iv) systems interruption; (v) disruptionof our business operations; (vi) remediation costs for repairs of system damage; (vii) reputational damage that18Table of Contentsadversely affects customer or investor confidence; and (viii) damage to our competitiveness, stock price, and long-term stockholdervalue. A breach could also originate from, or compromise, our customers’ and vendors’ or other third-party networks outside of ourcontrol. A breach may also result in legal claims or proceedings against us by our shareholders, employees, customers, vendors, andgovernmental authorities (U.S. and non-U.S.). There can be no assurance that our infrastructure protection technologies and disasterrecovery plans can prevent a technology systems breach or systems failure, which could have a material adverse effect on our financialposition or results of operations. Furthermore, the continuing and evolving threat of cyber-attacks has resulted in increased regulatoryfocus on prevention. To the extent we face increased regulatory requirements, we may be required to expend significant additionalresources to meet such requirements.In addition, new laws and regulations governing data privacy and the unauthorized disclosure of confidential information, including theEuropean Union General Data Protection Regulation and recent California legislation, pose increasingly complex compliancechallenges and potentially elevate our costs. Any failure by us to comply with these laws and regulations, including as a result of asecurity or privacy breach, could result in significant penalties and liabilities for us. Additionally, if we acquire a company that hasviolated or is not in compliance with applicable data protection laws, we may incur significant liabilities and penalties as a result.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 or similar agreements. To the extent we are in negotiations forlabor agreements expiring in the future, there is no assurance an agreement will be reached without a strike, work stoppage, or otherlabor action. Any prolonged strike, work stoppage, or other labor action could have an adverse effect on our financial condition orresults of operations. In addition, future federal, state, or foreign labor legislation could result in labor shortages and higher costs,especially during critical maintenance 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.19Table 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 and implements a new system oftaxation for non-U.S. earnings, including by imposing a one-time tax on the deemed repatriation of undistributed earnings of non-U.S.subsidiaries. Tax Reform also generally will (i) limit our annual deductions for interest expense to no more than 30 percent of our“adjusted taxable income” (plus 100 percent of our business interest income) for the year and (ii) permit us to offset only 80 percent(rather than 100 percent) of our taxable income with any net operating losses we generate after 2017. We have evaluated the effects ofTax Reform, including the one-time deemed repatriation tax and the re-measurement of our deferred tax assets and liabilities, and theprovisions of Tax Reform, taken as a whole, did not have an adverse impact on our cash tax liabilities, results of operations, or financialcondition. We have used reasonable interpretations and assumptions in applying Tax Reform, but it is possible that the InternalRevenue Service (IRS) could issue subsequent guidance or take positions on audit that differ from our prior interpretations andassumptions, which could adversely impact our 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.Changes in the method of determining the London Interbank Offered Rate (LIBOR), or the replacement of LIBOR with an alternativereference rate, may adversely affect interest rates.On July 27, 2017, the Financial Conduct Authority (FCA) in the U.K. announced that it would phase out LIBOR as a benchmark by theend of 2021. It is unclear whether new methods of calculating LIBOR will be established such that it continues to exist after 2021, orwhether different benchmark rates used to price indebtedness will develop. In the future, we may need to renegotiate our revolvingcredit facility (the Valero Revolver) or incur other indebtedness, and the phase-out of LIBOR may negatively impact the terms of suchindebtedness. In addition, the overall financial market may be disrupted as a result of the phase-out or replacement of LIBOR.Disruption in the financial market could have a material adverse effect on our financial position, results of operations, and liquidity.20Table of ContentsChanges in the U.K.’s economic and other relationships with the European Union could adversely affect us.In June 2016, the U.K. elected to withdraw from the European Union in a national referendum (Brexit). Withdrawal negotiations haveyet to produce an overall structure for an ongoing relationship between the U.K. and the European Union following Brexit. Theongoing uncertainty and potential imposition of border controls and customs duties on trade as a result of Brexit could negativelyimpact our competitive position, supplier and customer relationships, and financial performance. The ultimate effects of Brexit willdepend on the specific terms of any agreement reached by the U.K. and the European Union.ITEM 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 1 of Notes toConsolidated Financial Statements under the caption “Legal Contingencies.”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). We have an outstanding Notice of Violation (NOV) from the U.S. EPA related to violations from a 2015 MobileSource Inspection. We are working with the EPA to resolve this matter.Bay Area Air Quality Management District (BAAQMD) (Benicia Refinery). We have outstanding Violation Notices (VNs) issued by theBAAQMD from 2017 to present. These VNs are for various alleged air regulation and air permit violations at our Benicia Refinery andasphalt plant. We are working with the BAAQMD to resolve the VNs.South Coast Air Quality Management District (SCAQMD) (Wilmington Refinery). We have outstanding NOVs issued by the SCAQMD.These NOVs are for alleged reporting violations and excess emissions at our Wilmington Refinery. We are working with the SCAQMDto resolve these NOVs.Texas Commission on Environmental Quality (TCEQ) (McKee Refinery). We have a proposed Agreed Order in the amount of $121,314from the TCEQ as an administrative penalty for alleged excess emissions at our McKee Refinery. We are working with the TCEQ toresolve this matter.TCEQ (Port Arthur). We have an outstanding Notice of Enforcement (NOE) from the TCEQ alleging unauthorized emissions associatedwith a November 18, 2017 release of crude oil from the 24-inch fill pipe of Tank T-285. We are working with the TCEQ to resolve thismatter.21Table of ContentsTCEQ and Harris County Pollution Control Services Department (HCPCS) (Houston Terminal). We have an outstanding NOE from theTCEQ and an outstanding VN from the HCPCS alleging excess emissions from Tank 003 that occurred during Hurricane Harvey. Weare working with the pertinent authorities to resolve these matters.ITEM 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 trading symbol “VLO.”As of January 31, 2019, there were 5,271 holders of record of our common stock.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.The following table discloses purchases of shares of our common stock made by us or on our behalf during the fourth quarter of 2018.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 2018 939,957 $87.23 8,826 931,131 $2.7 billionNovember 2018 3,655,945 $87.39 216,469 3,439,476 $2.4 billionDecember 2018 3,077,364 $73.43 4,522 3,072,842 $2.2 billionTotal 7,673,266 $81.77 229,817 7,443,449 $2.2 billion(a)The shares reported in this column represent purchases settled in the fourth quarter of 2018 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 January 23, 2018, we announced that our board of directors authorized our purchase of up to $2.5 billion of our outstanding common stock (the2018 Program), with no expiration date, which was in addition to the remaining amount available under a $2.5 billion program authorized onSeptember 21, 2016 (the 2016 Program). During the fourth quarter of 2018, we completed our purchases under the 2016 Program. As of December 31,2018, we had $2.2 billion remaining available for purchase under the 2018 Program.22Table 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, 2013 and ending December 31, 2018. Our peer group comprises the following eight companies: BP plc; CVR Energy,Inc.; Delek US Holdings, Inc.; HollyFrontier Corporation; Marathon Petroleum Corporation; PBF Energy Inc.; Phillips 66; and RoyalDutch 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, 2013 2014 2015 2016 2017 2018Valero Common Stock$100.00 $100.24 $147.15 $148.30 $207.60 $174.97S&P 500100.00 113.69 115.26 129.05 157.22 150.33Peer Group100.00 91.36 80.82 97.00 122.98 114.59____________________________________(a)Assumes that an investment in Valero common stock and each index was $100 on December 31, 2013. “Cumulative total return” is based on share price appreciation plusreinvestment of dividends from December 31, 2013 through December 31, 2018.23Table of ContentsITEM 6. SELECTED FINANCIAL DATAThe selected financial data for the five-year period ended December 31, 2018 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, 2018 2017 (a) 2016 (b) 2015 (c) 2014Revenues$117,033 $93,980 $75,659 $87,804 $130,844Income from continuingoperations3,353 4,156 2,417 4,101 3,775Earnings per commonshare from continuingoperations – assuming dilution7.29 9.16 4.94 7.99 6.97Dividends per common share3.20 2.80 2.40 1.70 1.05Total assets50,155 50,158 46,173 44,227 45,355Debt and capital leaseobligations, less current portion8,871 8,750 7,886 7,208 5,747_________________________________________________(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 as described inNote 15 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 5 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.24Table 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,” “scheduled,”“estimate,” “project,” “projection,” “predict,” “budget,” “forecast,” “goal,” “guidance,” “target,” “could,” “would,” “should,” “will,”“may,” and similar expressions.These forward-looking statements include, among other things, statements regarding:•future refining segment margins, including gasoline and distillate margins;•future ethanol segment margins;•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;25Table 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 tariffs and tax and environmental regulations, such as those implemented under the California cap-and-trade system (also known as AB 32) and similar programs, and the U.S. EPA’s regulation of GHGs, which may adversely affectour business or operations;•changes in the credit ratings assigned to our debt securities and trade credit;•changes in currency exchange rates, including the value of the Canadian dollar, the pound sterling, the euro, the Mexican peso,and the Peruvian sol relative to the U.S. dollar;•overall economic conditions, including the stability and liquidity of financial markets; and•other factors generally described in the “Risk Factors” section included in 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(including adjusted operating income for each of our reportable segments), and refining and ethanol segment margin. We have includedthese non-GAAP financial measures to help facilitate the comparison of operating results between years. See the accompanyingfinancial tables in “RESULTS OF OPERATIONS” and note (h) to the accompanying tables for reconciliations of26Table of Contentsthese non-GAAP financial measures to the most directly comparable U.S. GAAP financial measures. Also in note (h), we disclose thereasons why we believe our use of the non-GAAP financial measures provides useful information.OVERVIEW AND OUTLOOKOverviewFor 2018, we reported net income attributable to Valero stockholders of $3.1 billion compared to $4.1 billion for 2017, whichrepresents a decrease of $943 million. This decrease is primarily due to a $1.9 billion tax benefit in 2017 resulting from Tax Reform,which is discussed in Note 15 of Notes to Consolidated Financial Statements, partially offset by a $1.0 billion increase in income beforeincome tax expense. The increase in income before income tax expense is primarily due to higher operating income between the yearsas described below.Operating income was $4.6 billion for 2018 compared to $3.6 billion for 2017, which represents an increase of $1.0 billion. Excludingthe adjustments to operating income reflected in the tables on page 32, adjusted operating income increased by $931 million in 2018compared to 2017.The $931 million increase in adjusted operating income is primarily due to the following:•Refining segment. Refining segment adjusted operating income increased $961 million primarily due to improved distillatemargins, favorable crude oil discounts, and lower costs of biofuel credits, partially offset by lower gasoline margins. This ismore fully described on pages 36 through 37.•Ethanol segment. Ethanol segment operating income decreased by $90 million primarily due to lower ethanol prices and highercorn prices, partially offset by higher corn related co-products prices. This is more fully described on pages 37 through 38.•VLP segment. VLP segment adjusted operating income increased by $50 million primarily due to incremental revenues, partiallyoffset by higher cost of sales, generated from transportation and terminaling services associated with a terminal and a productpipeline system acquired by VLP in November 2017 that were formerly a part of the refining segment. This is more fullydescribed on page 38.•Corporate and eliminations. Adjusted corporate and eliminations decreased by $10 million primarily due to expenses in 2017associated with the termination of the acquisition of certain assets from Plains All American Pipeline, L.P. (Plains). This is morefully 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”.27Table of ContentsOutlookBelow are several factors that have impacted or may impact our results of operations during the first quarter of 2019:•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 available in the market remain suppressed.•Sweet crude oil discounts are expected to remain near current levels as export demand remains strong and freight costs continueto rise. U.S. inland sweet crude oil discounts are also expected to remain wide with higher production and limited pipelinecapacity to transport crude oil out of the Permian Basin and other producing regions in the U.S.•Our refining operations in the U.K. could be adversely affected by Brexit, which is currently scheduled to occur on March 29,2019. The U.K. and the European Union have yet to finalize the terms of Brexit, and the U.K.’s exit from the European Unionwithout an agreement on an overall structure for an ongoing relationship with the European Union could result in the impositionof border controls and customs duties on trade that could negatively impact the operations of our Pembroke Refinery. While wedo not believe that Brexit will have a material impact on us, we are taking steps to minimize the impact of possible delays onimporting certain materials critical to our refining operations. The ultimate effect of Brexit will depend on the specific terms ofany agreement reached by the U.K. and the European Union. See Item 1A “Risk Factors”—Changes in the U.K.’s economicand other relationships with the European Union could adversely affect us.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 (h) to these tables, we disclose the reasons why we believe our use of non-GAAP financial measures provides usefulinformation.On January 10, 2019, we completed our acquisition of all the outstanding publicly held common units of VLP pursuant to the MergerAgreement with VLP as defined and discussed in Note 2 of Notes to Consolidated Financial Statements. Upon completion of the MergerTransaction, VLP became an indirect wholly owned subsidiary of Valero.28Table of Contents2018 Compared to 2017Financial Highlights by Segment and Total Company(millions of dollars) Year Ended December 31, 2018 Refining Ethanol VLP CorporateandEliminations TotalRevenues: Revenues from external customers$113,601 $3,428 $— $4 $117,033Intersegment revenues14 210 546 (770) —Total revenues113,615 3,638 546 (766) 117,033Cost of sales: Cost of materials and other (a)102,489 3,008 — (765) 104,732Operating expenses (excluding depreciation andamortization expense reflected below)4,099 470 125 (4) 4,690Depreciation and amortization expense1,863 78 76 — 2,017Total cost of sales108,451 3,556 201 (769) 111,439Other operating expenses45 — — — 45General and administrative expenses (excludingdepreciation and amortization expense reflectedbelow) (b)— — — 925 925Depreciation and amortization expense— — — 52 52Operating income by segment$5,119 $82 $345 $(974) 4,572Other income, net (c) 130Interest and debt expense, net of capitalizedinterest (470)Income before income tax expense 4,232Income tax expense (d) (e) 879Net income 3,353Less: Net income attributable to noncontrollinginterests (a) 231Net income attributable toValero Energy Corporation stockholders $3,122________________See note references on pages 45 through 48.29Table of ContentsFinancial Highlights by Segment and Total Company (continued)(millions of dollars) Year Ended December 31, 2017 Refining Ethanol VLP CorporateandEliminations TotalRevenues: Revenues from external customers$90,651 $3,324 $— $5 $93,980Intersegment revenues6 176 452 (634) —Total 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)3,959 443 104 (2) 4,504Depreciation and amortization expense1,800 81 53 — 1,934Total cost of sales86,624 3,328 157 (634) 89,475Other operating expenses58 — 3 — 61General and administrative expenses (excludingdepreciation and amortization expense reflectedbelow)— — — 829 829Depreciation and amortization expense— — — 52 52Operating income by segment$3,975 $172 $292 $(876) 3,563Other income, net 112Interest and debt expense, net of capitalizedinterest (468)Income before income tax expense 3,207Income tax benefit (d) (e) (949)Net income 4,156Less: Net income attributable to noncontrollinginterests 91Net income attributable toValero Energy Corporation stockholders $4,065________________See note references on pages 45 through 48.30Table of ContentsFinancial Highlights by Segment and Total Company (continued)(millions of dollars) Year Ended December 31, 2018 2017Reconciliation of net income attributable to Valero EnergyCorporation stockholders to adjusted net income attributable toValero Energy Corporation stockholders (h) Net income attributable to Valero Energy Corporation stockholders$3,122 $4,065Exclude adjustments: Blender’s tax credit attributable to Valero Energy Corporation stockholders (a)90 —Income tax expense related to the blender’s tax credit(11) —Blender’s tax credit attributable to Valero Energy Corporation stockholders,net of taxes79 —Texas City Refinery fire expenses(17) —Income tax benefit related to Texas City Refinery fire expenses4 —Texas City Refinery fire expenses, net of taxes(13) —Environmental reserve adjustments (b)(108) —Income tax benefit related to the environmental reserve adjustments24 —Environmental reserve adjustments, net of taxes(84) —Loss on early redemption of debt (c)(38) —Income tax benefit related to the loss on early redemption of debt9 —Loss on early redemption of debt, net of taxes(29) —Income tax benefit from Tax Reform (d)12 1,862Total adjustments(35) 1,862Adjusted net income attributable to Valero Energy Corporation stockholders$3,157 $2,203________________See note references on pages 45 through 48.31Table of ContentsFinancial Highlights by Segment and Total Company (continued)(millions of dollars) Year Ended December 31, 2018 Refining Ethanol VLP CorporateandEliminations TotalReconciliation of operating income to adjustedoperating income (h) Operating income by segment$5,119 $82 $345 $(974) $4,572Exclude: Blender’s tax credit (a)170 — — — 170Other operating expenses(45) — — — (45)Environmental reserve adjustments (b)— — — (108) (108)Adjusted operating income$4,994 $82 $345 $(866) $4,555 Year Ended December 31, 2017 Refining Ethanol VLP CorporateandEliminations TotalReconciliation of operating income to adjustedoperating income (h) Operating income by segment$3,975 $172 $292 $(876) $3,563Exclude: Other operating expenses(58) — (3) — (61)Adjusted operating income$4,033 $172 $295 $(876) $3,624________________See note references on pages 45 through 48.32Table of ContentsRefining Segment Operating Highlights(millions of dollars, except per barrel amounts) Year Ended December 31, 20182017 ChangeThroughput volumes (thousand barrels per day (BPD)) Feedstocks: Heavy sour crude oil469 469 —Medium/light sour crude oil418 458 (40)Sweet crude oil1,410 1,323 87Residuals232 219 13Other feedstocks127 148 (21)Total feedstocks2,656 2,617 39Blendstocks and other330 323 7Total throughput volumes2,986 2,940 46 Yields (thousand BPD) Gasolines and blendstocks1,443 1,423 20Distillates1,133 1,127 6Other products (i)449 428 21Total yields3,025 2,978 47 Operating statistics (j) Refining segment margin (h)$10,956 $9,792 $1,164Adjusted refining segment operating income(see page 32) (h)$4,994 $4,033 $961Throughput volumes (thousand BPD)2,986 2,940 46 Refining segment margin per barrel of throughput$10.05 $9.12 $0.93Less: Operating expenses (excluding depreciation andamortization expense reflected below) per barrel ofthroughput3.76 3.69 0.07Depreciation and amortization expense per barrel ofthroughput1.71 1.67 0.04Adjusted refining segment operating income per barrel ofthroughput$4.58 $3.76 $0.82_______________See note references on pages 45 through 48.33Table of ContentsEthanol Segment Operating Highlights(millions of dollars, except per gallon amounts) Year Ended December 31, 2018 2017 ChangeOperating statistics (j) Ethanol segment margin (h)$630 $696 $(66)Ethanol segment operating income(see page 32)$82 $172 $(90)Production volumes (thousand gallons per day)4,109 3,972 137 Ethanol segment margin per gallon of production$0.42 $0.48 $(0.06)Less: Operating expenses (excluding depreciation andamortization expense reflected below) per gallon ofproduction0.31 0.31 —Depreciation and amortization expense per gallon ofproduction0.06 0.05 0.01Ethanol segment operating income per gallon ofproduction$0.05 $0.12 $(0.07)VLP Segment Operating Highlights(millions of dollars, except per barrel amounts) Year Ended December 31, 2018 2017 ChangeOperating statistics (j) Pipeline transportation revenue$124 $101 $23Terminaling revenue415 348 67Storage and other revenue7 3 4Total VLP segment revenues$546 $452 $94 Pipeline transportation throughput(thousand BPD)1,092 964 128Pipeline transportation revenue per barrel of throughput$0.31 $0.29 $0.02 Terminaling throughput (thousand BPD)3,594 2,889 705Terminaling revenue per barrel of throughput$0.32 $0.33 $(0.01)_______________See note references on pages 45 through 48.34Table of ContentsAverage Market Reference Prices and Differentials(dollars per barrel, except as noted) Year Ended December 31, 2018 2017 ChangeFeedstocks Brent crude oil$71.62 $54.82 $16.80Brent less West Texas Intermediate (WTI) crude oil6.71 3.92 2.79Brent less Alaska North Slope (ANS) crude oil0.31 0.26 0.05Brent less Louisiana Light Sweet (LLS) crude oil1.72 0.69 1.03Brent less Argus Sour Crude Index (ASCI) crude oil5.20 4.18 1.02Brent less Maya crude oil9.22 7.74 1.48LLS crude oil69.90 54.13 15.77LLS less ASCI crude oil3.48 3.49 (0.01)LLS less Maya crude oil7.50 7.05 0.45WTI crude oil64.91 50.90 14.01 Natural gas (dollars per million British thermal units (MMBtu))3.23 2.98 0.25 Products U.S. Gulf Coast: CBOB gasoline less Brent4.81 10.50 (5.69)Ultra-low-sulfur diesel less Brent14.02 13.26 0.76Propylene less Brent(2.86) 0.48 (3.34)CBOB gasoline less LLS6.53 11.19 (4.66)Ultra-low-sulfur diesel less LLS15.74 13.95 1.79Propylene less LLS(1.14) 1.17 (2.31)U.S. Mid-Continent: CBOB gasoline less WTI13.70 15.65 (1.95)Ultra-low-sulfur diesel less WTI22.82 18.50 4.32North Atlantic: CBOB gasoline less Brent7.59 12.57 (4.98)Ultra-low-sulfur diesel less Brent16.29 14.75 1.54U.S. West Coast: CARBOB 87 gasoline less ANS13.05 18.12 (5.07)CARB diesel less ANS18.13 17.11 1.02CARBOB 87 gasoline less WTI19.45 21.78 (2.33)CARB diesel less WTI24.53 20.77 3.76New York Harbor corn crush (dollars per gallon)0.15 0.26 (0.11)35Table of ContentsTotal Company, Corporate, and OtherRevenues increased $23.1 billion in 2018 compared to 2017 primarily due to increases in refined petroleum product prices associatedwith sales made by our refining segment. This improvement in revenues was partially offset by higher cost of sales of $22 billionprimarily due to increases in crude oil and other feedstock costs, and an increase of $96 million in general and administrative expenses(excluding depreciation and amortization expense), resulting in an increase in operating income of $1.0 billion in 2018 compared to2017.Excluding the adjustments to operating income reflected in the tables on page 32, adjusted operating income increased by $931 millionin 2018 compared to 2017. Details regarding the $931 million increase in adjusted operating income between the years are discussedby segment below.Other income, net increased $18 million in 2018 compared to 2017 primarily due to higher equity in earnings associated with ourDiamond pipeline joint venture of $39 million and higher interest income of $29 million, partially offset by a $38 million charge fromthe early redemption of debt as described in note (c) to the accompanying tables (see page 45).Income tax expense increased $1.8 billion in 2018 compared to 2017 primarily due to the effect from a $1.9 billion income tax benefitin 2017 resulting from Tax Reform, which is described in Note 15 of Notes to Consolidated Financial Statements. Excluding the incometax adjustments reflected in the table on page 31 from both years, the effective tax rate for 2018 was 22 percent compared to 28 percentfor 2017. The decrease in our effective tax rate is primarily due to the reduction in the U.S. statutory income tax rate from 35 percent to21 percent effective January 1, 2018 as a result of Tax Reform.Net income attributable to noncontrolling interests increased $140 million in 2018 compared to 2017 primarily due to higher earningsassociated with DGD, our consolidated joint venture, which includes a benefit of $80 million for the blender’s tax credit, as described innote (a) to the accompanying tables (see page 45).Refining Segment ResultsRefining segment revenues increased $23.0 billion in 2018 compared to 2017 primarily due to increases in refined petroleum productprices. This improvement in refining segment revenues was partially offset by higher cost of sales of $21.8 billion due primarily toincreases in crude oil and other feedstock costs, resulting in an increase in refining segment operating income of $1.1 billion in 2018compared to 2017.Excluding the adjustments to refining segment operating income reflected in the tables on page 32, refining segment adjusted operatingincome increased by $961 million in 2018 compared to 2017. The components of this increase, along with reasons for the changes inthese components, are outlined below.Refining segment margin, as defined in note (h) to the accompanying tables (see page 46), increased $1.2 billion in 2018 compared to2017, primarily due to the following:•Increase in distillate margins. We experienced improved distillate margins throughout all of our regions in 2018 compared to2017. For example, the Brent-based benchmark reference margin for U.S. Gulf Coast ultra-low-sulfur diesel was $14.02 perbarrel for 2018 compared to $13.26 per barrel for 2017, representing a favorable increase of $0.76 per barrel. Another exampleis the WTI-based benchmark reference margin for U.S. Mid-Continent ultra-low-sulfur diesel that was $22.82 per barrel for2018 compared to $18.50 per barrel for 2017, representing a favorable increase of $4.32 per barrel. We estimate that theincrease in distillate margins per barrel in 2018 compared to 2017 had a favorable impact to our refining segment margin ofapproximately $1.3 billion.36Table of Contents•Higher discounts on crude oils. The market prices for refined petroleum products generally track the price of Brent crude oil,which is a benchmark sweet crude oil, and we benefit when we process crude oils that are priced at a discount to Brent crudeoil. We benefitted from processing these types of crude oils in 2018 and that benefit improved compared to 2017. For example,WTI crude oil, a light sweet crude oil, sold at a discount to Brent of $6.71 per barrel for 2018 compared to a discount of$3.92 per barrel for 2017, representing a favorable increase of $2.79 per barrel. Another example is Maya crude oil, a sourcrude oil processed in our U.S. Gulf Coast region, which sold at a discount to Brent of $9.22 per barrel for 2018 compared to$7.74 per barrel for 2017, representing a favorable increase of $1.48 per barrel. We estimate that the increase in the discountsfor crude oils that we processed during 2018 compared to 2017 had a favorable impact to our refining segment margin ofapproximately $561 million.•Lower costs of biofuel credits. As described in Note 20 of Notes to Consolidated Financial Statements, we purchase biofuelcredits in order to meet our biofuel blending obligation under various government and regulatory compliance programs. Thecost of these credits (primarily RINs in the U.S.) was $536 million in 2018 compared to $942 million in 2017, a decrease of$406 million.•Higher throughput volumes. Refining segment throughput volumes increased by 46,000 BPD in 2018. We estimate that theincrease in refining throughput volumes had a positive impact on our refining segment margin of approximately $153 million.•Decrease in gasoline margins. We experienced a decrease in gasoline margins throughout all of our regions in 2018 comparedto 2017. For example, the Brent-based benchmark reference margin for U.S. Gulf Coast CBOB gasoline was $4.81 per barrelfor 2018 compared to $10.50 per barrel for 2017, representing an unfavorable decrease of $5.69 per barrel. Another example isthe ANS-based benchmark reference margin for U.S. West Coast CARBOB 87 gasoline, which was $13.05 per barrel for 2018compared to $18.12 per barrel for 2017, representing an unfavorable decrease of $5.07 per barrel. We estimate that the decreasein gasoline margins per barrel in 2018 compared to 2017 had an unfavorable impact to our refining segment margin ofapproximately $1.3 billion.Refining segment operating expenses (excluding depreciation and amortization expense) increased $140 million primarily due to higheremployee-related expenses of $33 million, an increase in energy costs driven by higher natural gas prices ($3.23 per MMBtu in 2018compared to $2.98 per MMBtu in 2017) of $28 million, higher chemicals and catalyst costs of $24 million, the effect from a favorableinsurance settlement of $20 million in 2017 for our McKee Refinery, and higher maintenance expense of $12 million.Refining segment depreciation and amortization expense associated with our cost of sales increased $63 million due to an increase inrefinery turnaround amortization expense of $41 million primarily due to costs incurred in the latter part of 2017 and early 2018 inconnection with significant turnaround projects at our Corpus Christi and McKee Refineries, along with the write-off of assets that wereidled or demolished in 2018 of $15 million.Ethanol Segment ResultsEthanol segment revenues increased $138 million in 2018 compared to 2017 primarily due to an increase in ethanol sales volumes andincreases in corn related co-product prices along with the revenue contribution associated with three ethanol plants acquired from GreenPlains, Inc. (Green Plains) on November 15, 2018, which is described in Note 2 of Notes to Consolidated Financial Statements. Thisincrease is partially offset by lower ethanol prices. This improvement in ethanol segment revenue was more than offset by higher costof sales of $228 million primarily due to higher corn prices, resulting in a decrease in ethanol segment37Table of Contentsoperating income of $90 million in 2018 compared to 2017. The components of this decrease, along with reasons for the changes inthese components, are outlined below.Ethanol segment margin, as defined in note (h) to the accompanying tables (see page 46), decreased $66 million in 2018 compared to2017, primarily due to the following:•Lower ethanol prices. Ethanol prices were lower in 2018 compared to 2017 primarily due to an increase in production. Forexample, the New York Harbor ethanol price was $1.48 per gallon for 2018 compared to $1.56 per gallon for 2017,representing an unfavorable decrease of $0.08 per gallon. We estimate that the decrease in the price of ethanol had anunfavorable impact to our ethanol segment margin of approximately $159 million.•Higher corn prices. Corn prices were higher in 2018 compared to 2017. For example, the Chicago Board of Trade (CBOT) cornprice was $3.68 per bushel for 2018 compared to $3.59 per bushel for 2017, representing an unfavorable increase of $0.09 perbushel. We estimate that the increase in the price of corn had an unfavorable impact to our ethanol segment margin ofapproximately $36 million.•Higher co-product prices. An increase in protein values, as compared to soybean meal, had a favorable effect on the pricesreceived for the corn related co-products that we produced. We estimate the increase in corn related co-product prices had afavorable impact to our ethanol segment margin of approximately $101 million.•Higher production volumes. Ethanol segment margin was favorably impacted by increased production volumes of137,000 gallons per day in 2018 compared to 2017 primarily due to reliability improvements at our ethanol plants and theadditional production volumes associated with the three plants acquired from Green Plains in November 2018. We estimate thatthe increase in production volumes had a favorable impact to our ethanol segment margin of approximately $26 million.Ethanol segment operating expenses (excluding depreciation and amortization expense) increased $27 million primarily due to costs tooperate the three plants acquired from Green Plains in November 2018 of $14 million, coupled with higher chemicals and catalystsexpenses of $8 million.VLP Segment ResultsVLP segment revenues increased $94 million in 2018 compared to 2017 primarily due to $75 million of incremental revenuesgenerated from transportation and terminaling services associated with the Port Arthur terminal and the Parkway pipeline acquired byVLP in November 2017 that were formerly a part of the refining segment. The increase in VLP segment revenues was partially offset byhigher cost of sales of $44 million primarily due to the costs to operate the acquired terminal and pipeline, resulting in an increase inVLP segment operating income of $53 million in 2018 compared to 2017. Excluding the adjustment reflected in the table on page 32,VLP adjusted operating income increased $50 million.Corporate and EliminationsCorporate and eliminations, which consists primarily of general and administrative expenses and related depreciation and amortizationexpense, increased by $98 million in 2018 compared to 2017. Excluding the environmental reserve adjustments of $108 million from2018 reflected in the table on page 32, adjusted corporate and eliminations decreased by $10 million in 2018 primarily due to the effectfrom expenses incurred in 2017 associated with the termination of the acquisition of certain assets from Plains.38Table of Contents2017 Compared to 2016Financial Highlights by Segment and Total Company(millions of dollars) Year Ended December 31, 2017 Refining Ethanol VLP CorporateandEliminations TotalRevenues: Revenues from external customers$90,651 $3,324 $— $5 $93,980Intersegment revenues6 176 452 (634) —Total 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)3,959 443 104 (2) 4,504Depreciation and amortization expense1,800 81 53 — 1,934Total cost of sales86,624 3,328 157 (634) 89,475Other operating expenses58 — 3 — 61General and administrative expenses (excludingdepreciation and amortization expense reflectedbelow)— — — 829 829Depreciation and amortization expense— — — 52 52Operating income by segment$3,975$172$292$(876) 3,563Other income, net 112Interest and debt expense, net of capitalizedinterest (468)Income before income tax expense 3,207Income tax expense (benefit) (d) (e) (949)Net income 4,156Less: Net income attributable to noncontrollinginterests 91Net income attributable toValero Energy Corporation stockholders $4,065________________See note references on pages 45 through 48.39Table of ContentsFinancial Highlights by Segment and Total Company (continued)(millions of dollars) Year Ended December 31, 2016 Refining Ethanol VLP CorporateandEliminations TotalRevenues: Revenues from external customers$71,968 $3,691 $— $— $75,659Intersegment revenues— 210 363 (573) —Total 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)3,740 415 96 — 4,251Depreciation and amortization expense1,734 66 46 — 1,846Lower of cost or market inventory valuationadjustment (f)(697) (50) — — (747)Total cost of sales68,182 3,561 142 (573) 71,312General and administrative expenses (excludingdepreciation and amortization expense reflectedbelow)— — — 709 709Depreciation and amortization expense— — — 48 48Asset impairment loss (g)56 — — — 56Operating income by segment$3,730$340$221$(757)3,534Other income, net 94Interest and debt expense, net of capitalizedinterest (446)Income before income tax expense 3,182Income tax expense (g) 765Net income 2,417Less: Net income attributable to noncontrollinginterests 128Net income attributable toValero Energy Corporation stockholders $2,289________________See note references on pages 45 through 48.40Table 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 (h) Net income attributable to Valero Energy Corporation stockholders$4,065 $2,289Exclude adjustments: Lower of cost or market inventory valuation adjustment (f)— 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 (g)— (56)Income tax benefit on Aruba Disposition (g)— 42Income tax benefit from Tax Reform (d) (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 (h) Operating income by segment$3,975 $172 $292 $(876) $3,563Exclude: Other operating expenses(58) — (3) — (61)Adjusted operating income$4,033 $172 $295 $(876) $3,624 Year Ended December 31, 2016 Refining Ethanol VLP CorporateandEliminations TotalReconciliation of operating income to adjustedoperating income (h) Operating income by segment$3,730 $340 $221 $(757) $3,534Exclude: Lower of cost or market inventory valuationadjustment (f)697 50 — — 747Asset impairment loss (g)(56) — — — (56)Adjusted operating income$3,089 $290 $221 $(757) $2,843_______________See note references on pages 45 through 48.41Table 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 (i)428 421 7Total yields2,978 2,891 87 Operating statistics (j) Refining segment margin (h)$9,792 $8,563 $1,229Adjusted refining segment operating income(see page 41) (h)$4,033 $3,089 $944Throughput volumes (thousand BPD)2,940 2,855 85 Refining segment margin per barrel of throughput$9.12 $8.20 $0.92Less: Operating expenses (excluding depreciation andamortization expense reflected below) per barrel ofthroughput3.69 3.58 0.11Depreciation and amortization expense per barrel ofthroughput1.67 1.66 0.01Adjusted refining segment operating income per barrel ofthroughput$3.76 $2.96 $0.80_______________See note references on pages 45 through 48.42Table of ContentsEthanol Segment Operating Highlights(millions of dollars, except per gallon amounts) Year Ended December 31, 2017 2016 ChangeOperating statistics (j) Ethanol segment margin (h)$696 $771 $(75)Adjusted ethanol segment operating income(see page 41) (h)$172 $290 $(118)Production volumes (thousand gallons per day)3,972 3,842 130 Ethanol segment margin per gallon of production$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$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 (j) Pipeline transportation revenue$101 $78 $23Terminaling revenue348 284 64Storage and other revenue3 1 2Total VLP segment revenues$452 $363 $89 Pipeline transportation throughput(thousand BPD)964 829 135Pipeline transportation revenue per barrel of throughput$0.29 $0.26 $0.03 Terminaling throughput (thousand BPD)2,889 2,265 624Terminaling revenue per barrel of throughput$0.33 $0.34 $(0.01)_______________See note references on pages 45 through 48.43Table 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 WTI crude oil3.92 1.83 2.09Brent less ANS crude oil0.26 1.25 (0.99)Brent less LLS crude oil0.69 0.15 0.54Brent less 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)44Table of ContentsThe following notes relate to references on pages 29 through 34 and pages 39 through 43.(a)Cost of materials and other for the year ended December 31, 2018 includes a benefit of $170 million for the biodiesel blender’s tax credit attributable tovolumes blended during 2017. The benefit was recognized in February 2018 because the legislation authorizing the credit was passed and signed intolaw in that month. The $170 million pre-tax benefit is included in the refining segment and includes $80 million attributable to noncontrolling interestand $90 million attributable to Valero Energy Corporation stockholders.(b)General and administrative expenses (excluding depreciation and amortization expense) for the year ended December 31, 2018 includes a charge of$108 million for an environmental reserve adjustment associated with certain non-operating sites.(c)Other income, net for the year ended December 31, 2018 includes a $38 million charge from the early redemption of $750 million of our 9.375 percentsenior notes due March 15, 2019.(d)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. In addition, Tax Reform lowered the U.S. statutory income tax rate from 35 percent to21 percent, beginning January 1, 2018. Under U.S. GAAP we are required to recognize the effect of Tax Reform in the period of enactment. As a result, werecognized a $1.9 billion income tax benefit in December 2017, which represented our initial estimate of the impact of Tax Reform in accordance withStaff Accounting Bulletin No. 118 (SAB 118). We finalized our estimates in December 2018 and have recorded an additional benefit of $12 million forthe year ended December 31, 2018.(e)Excluding the income tax benefits discussed in note (d) from both years and the other adjustments to income tax reflected in the table on page 31 from2018, the effective tax rates for the years ended December 31, 2018 and 2017 were 22 percent and 28 percent, respectively. The decrease in the effectiverate is primarily due to the decline in the U.S. statutory income tax rate from 35 percent to 21 percent as a result of Tax Reform (see note (d)).(f)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 the periods. As of December 31, 2018 and December 31, 2017, the market price of our inventory was above cost;therefore we did not have a lower of cost or market inventory valuation reserve as of those dates. During the year ended December 31, 2016, we recordeda change in our inventory valuation reserve that was established on December 31, 2015, resulting in a noncash benefit of $747 million, of which$697 million and $50 million were attributable to our refining segment and ethanol segment, respectively.(g)Effective October 1, 2016 we (i) transferred ownership of all 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.45Table of ContentsIn 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.(h)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.Non-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 items noted below, along with their related income tax effect. We have excluded these items becausewe believe that they are not indicative of our core operating performance and that their exclusion results in an important measure of ourongoing financial performance to better assess our underlying business results and trends. The basis for our belief with respect to each excludeditem is provided below.–Blender’s tax credit attributable to Valero Energy Corporation stockholders - The blender’s tax credit is attributable to volumesblended during 2017 and is not related to 2018 activities, as described in note (a).–Lower of cost or market inventory valuation adjustment - The noncash benefit recorded during 2016 to adjust our inventory valuationreserve, as described in note (f).–Asset impairment loss - The impairment loss of $56 million in 2016 associated with the Aruba Disposition, as described in note (g).–Texas City Refinery fire expenses - The costs incurred to respond to and assess the damage caused by the fire that occurred at the TexasCity Refinery on April 19, 2018 are specific to that event and are not ongoing costs incurred in our operations.–Environmental reserve adjustments - The environmental reserve adjustments are attributable to sites that were shut down by priorowners and subsequently acquired by us (referred to by us as non-operating sites), as described in note (b).–Loss on early redemption of debt - The penalty and other expenses incurred in connection with the early redemption of our9.375 percent senior notes due March 15, 2019 (see note (c)) are not associated with the ongoing costs of our borrowing and financingactivities.–Income tax benefit from Tax Reform - Income tax benefit from Tax Reform (see note (d)) is associated with changes in U.S. taxlegislation and is not indicative of our core performance.–Income tax benefit from Aruba Disposition - The income tax benefit in 2016 resulting from the cancellation of outstanding debtobligations associated with the Aruba Disposition, as described in note (g).◦Refining margin is defined as refining operating income excluding the blender’s tax credit, the lower of cost or market inventory valuationadjustment, the asset impairment loss, operating expenses (excluding depreciation and amortization expense), other operating expenses, anddepreciation and amortization expense, as reflected in the table below.◦Ethanol margin is defined as ethanol operating income excluding the lower of cost or market inventory valuation adjustment, operatingexpenses (excluding depreciation and amortization expense), and depreciation and amortization expense, as reflected in the table below.46Table of Contents Year Ended December 31, 2018 2017 2016Reconciliation of refining segment operating incometo refining margin Operating income$5,119 $3,975 $3,730Add back: Blender’s tax credit (a)(170) — —Lower of cost or market inventory valuationadjustment (f)— — (697)Asset impairment loss (g)— — 56Operating expenses (excluding depreciation andamortization expense)4,099 3,959 3,740Depreciation and amortization expense1,863 1,800 1,734Other operating expenses45 58 —Refining margin$10,956$9,792 $8,563 Year Ended December 31, 2018 2017 2016Reconciliation of ethanol segment operating incometo ethanol margin Operating income$82 $172 $340Add back: Lower of cost or market inventory valuationadjustment (f)— — (50)Operating expenses (excluding depreciation andamortization expense)470 443 415Depreciation and amortization expense78 81 66Ethanol margin$630 $696 $771◦Adjusted refining operating income is defined as refining segment operating income excluding the blender’s tax credit, lower of cost or marketinventory valuation adjustment, asset impairment loss, and other operating expenses.◦Adjusted ethanol operating income is defined as ethanol segment operating income excluding the lower of cost or market inventory valuationadjustment.◦Adjusted VLP operating income is defined as VLP segment operating income excluding other operating expenses.◦Adjusted corporate and eliminations is defined as corporate and eliminations excluding the environmental reserve adjustments associated withcertain non-operating sites (see note (b)).(i)Other products primarily include petrochemicals, gas oils, No. 6 fuel oil, petroleum coke, sulfur, and asphalt.(j)Valero uses certain operating statistics (as noted below) to evaluate performance between comparable periods. Different companies may calculate them indifferent ways.Refining segment margin per barrel of throughput and adjusted refining segment operating income per barrel of throughput represents refining segmentmargin and adjusted refining segment operating income (each as defined in note (h) above) divided by the respective throughput volumes. Ethanolsegment margin per gallon of production and adjusted ethanol segment operating income per gallon of production represent ethanol segment margin and47Table of Contentsadjusted ethanol segment operating income (each as defined in note (h) above) divided by production volumes. Pipeline transportation revenue perbarrel of throughput and terminaling revenue per barrel of throughput represent pipeline transportation revenue and terminaling revenue for our VLPsegment divided by pipeline transportation throughput and terminaling throughput volumes, respectively. Throughput and production volumes arecalculated by multiplying production throughput and production volumes per day (as provided in the accompanying tables) by the number of days inthe applicable period.Total Company, Corporate, and OtherRevenues increased $18.3 billion in 2017 compared to 2016 primarily due to increases in refined petroleum products prices associatedwith sales made by our refining segment. This improvement in revenues was mostly offset by higher cost of sales of $18.2 billionprimarily due to increases in crude oil and other feedstock costs, and an increase of $120 million in general and administrative expenses(excluding depreciation and amortization expense), resulting in an increase in operating income of $29 million in 2017 compared to2016.Excluding the adjustments to operating income reflected in the tables on page 41, adjusted operating income increased by $781 millionin 2017 compared to 2016. Details regarding the $781 million increase in adjusted operating income between the years are discussed bysegment below.Income tax expense decreased $1.7 billion in 2017 compared to 2016 primarily due to the effect from a $1.9 billion income tax benefitin 2017 resulting from Tax Reform, which is described in Note 15 of Notes to Consolidated Financial Statements. Excluding the incometax adjustments reflected in the table on page 41 from both years, the effective tax rate for 2017 was 28 percent compared to 26 percentfor 2016. The effective tax rates are lower than the U.S. statutory rate of 35 percent that was in effect through December 31, 2017,primarily because income from our international operations was taxed at statutory rates that were lower than in the U.S. The effectivetax rate for 2016 was lower than the effective tax rate for 2017 due to a benefit in 2016 of $35 million resulting from the favorableresolution of an income tax audit.Refining Segment ResultsRefining segment revenues increased $18.7 billion in 2017 compared to 2016 primarily due to increases in refined petroleum productprices. This improvement in refining segment revenues was partially offset by higher cost of sales of $18.4 million primarily due toincreases in crude oil and other feedstock costs, resulting in an increase in operating income of $245 million in 2017 compared to 2016.Excluding the adjustments to refining segment operating income reflected in the tables on page 41, refining segment adjusted operatingincome increased by $944 million in 2017 compared to 2016. The components of this increase, along with the reasons for the changesin these components, are outlined below.Refining segment margin, as defined in note (h) to the accompanying tables (see page 46), increased $1.2 billion, primarily due to thefollowing:•Increase in distillate margins. We experienced improved distillate margins throughout all 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 for 2017 compared to $10.21 per barrel for 2016, representing a favorable increase of $3.05 per barrel. Another exampleis the WTI-based benchmark reference margin for U.S. Mid-Continent ultra-low-sulfur diesel that was $18.50 per barrel for2017 compared to $13.03 per barrel for 2016, representing a favorable increase of $5.47 per barrel. We estimate that theincrease in distillate margins per barrel in 2017 compared to 2016 had a favorable impact to our refining segment margin ofapproximately $1.2 billion.48Table of Contents•Increase in gasoline margins. We also experienced improved gasoline margins throughout all our regions in 2017 compared to2016. For example, the WTI-based benchmark reference margin for U.S. Mid-Continent CBOB gasoline was $15.65 per barrelfor 2017 compared to $11.82 per barrel for 2016, representing a favorable increase of $3.83 per barrel. Another example is theBrent-based reference margin for U.S. Gulf Coast CBOB gasoline, which was $10.50 per barrel for 2017 compared to $9.17 perbarrel for 2016, representing a favorable increase of $1.33 per barrel. We estimate that the increase in gasoline margins perbarrel 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 benefitted 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 for 2017compared to a discount of $5.18 per barrel for 2016, representing an unfavorable decrease of $1.00 per barrel. Anotherexample is Maya crude oil which sold at a discount to Brent of $7.74 per barrel for 2017 compared to $8.63 per barrel for 2016,representing an unfavorable decrease of $0.89 per barrel. We estimate that the reduction in discounts for sour crude oils that weprocessed in 2017 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 webenefitted 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 described in Note 20 of Notes to Consolidated Financial Statements, we purchase biofuelcredits in order to meet our biofuel blending obligation under various government and regulatory compliance programs. Thecost of these credits (primarily RINs in the U.S.) was $942 million in 2017 compared to $749 million in 2016, an increase of$193 million.•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 by terminals and a product pipeline system acquired byVLP in 2017 and 2016 that were formerly a part of the refining segment, as well as an undivided interest in crude system assetsacquired by VLP in 2017. Details regarding the increase in charges from VLP are discussed in the VLP segment analysis below.Refining segment operating expenses (excluding depreciation and amortization expense) increased $219 million primarily due to anincrease in energy costs driven by higher natural gas prices ($2.98 per MMBtu for 2017 compared to $2.46 per MMBtu for 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 to49Table 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 revenues decreased $401 million in 2017 compared to 2016 primarily due to lower ethanol and corn related co-product prices. This decline in ethanol segment revenue was partially offset by lower cost of sales of $233 million primarily due tolower corn prices, resulting in a decrease in ethanol segment operating income of $168 million in 2017 compared to 2016.Excluding the adjustment reflected in the table on page 41, ethanol segment adjusted operating income was $172 million for 2017compared to $290 million for 2016, a decrease of $118 million. The components of this decrease, along with the reasons for thechanges in these components, are outlined below.Ethanol segment margin, as defined in note (h) to the accompanying tables (see page 46), decreased $75 million in 2017 compared to2016 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 for 2017compared to $1.60 per gallon for 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 distiller’s grains, had anunfavorable effect on the prices we received. We estimate that the decrease in the price for corn related co-products had anunfavorable impact to our ethanol segment margin of approximately $52 million.•Lower corn prices. Despite a slight increase in the CBOT corn price from $3.58 per bushel for 2016 to $3.59 per bushel for2017, we acquired corn at lower prices due to favorable location differentials, resulting in a decrease in the price we paid forcorn in 2017 compared to 2016. We estimate that the decrease in the price we paid for corn had a favorable impact to ourethanol 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 for 2017 compared to $2.46 per MMBtu for 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.VLP Segment ResultsVLP segment revenues increased $89 million in 2017 compared to 2016 primarily due to $61 million of incremental revenuesgenerated from transportation and terminaling services associated with the Port Arthur terminal and the Parkway pipeline acquired byVLP in 2017 and the McKee, Meraux, and Three Rivers50Table of Contentsterminals acquired by VLP in 2016 that were formerly a part of the refining segment. In addition, incremental revenues of $10 millionwere generated from an undivided interest in the Red River crude system acquired in January 2017. The increase in VLP segmentrevenues was partially offset by higher cost of sales of $15 million primarily due to the costs to operate the acquired terminals, pipelineand crude system, resulting in an increase in VLP segment operating income of $71 million in 2017 compared to 2016. Excluding theadjustment reflected in the table on page 41, VLP adjusted operating income increased $74 million.Corporate and EliminationsCorporate and eliminations, which consists primarily of general and administrative expenses and related depreciation and amortizationexpense, increased $119 million in 2017 compared to 2016 primarily due to higher employee related costs of $50 million, an increasein legal and environmental reserves of $21 million, expenses associated with the termination of certain assets from Plains of$16 million, and an increase in charitable contributions of $10 million.LIQUIDITY AND CAPITAL RESOURCESOverviewWe believe that we have sufficient funds from operations and from borrowings under our credit facilities to fund our ongoing operatingrequirements and other commitments. We expect that, to the extent necessary, we can raise additional funds from time to time throughequity or debt financings in the public and private capital markets or the arrangement of additional credit facilities. However, there canbe 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.Our liquidity consisted of the following as of December 31, 2018 (in millions):Available borrowing capacity from committed facilities: Valero Revolver $2,943Canadian Revolver 107Accounts receivable sales facility 1,200Letter of credit facility 100Total available borrowing capacity 4,350Cash and cash equivalents(a) 2,747Total liquidity $7,097___________________(a)Excludes $235 million of cash and cash equivalents related to our variable interest entities (VIEs) that is available for use only by our VIEs.Information about our outstanding borrowings, letters of credit issued, and availability under our credit facilities is reflected in Note 9 ofNotes to Consolidated Financial Statements.51Table of ContentsCash Flows SummaryComponents of our cash flows are set forth below (in millions): Year Ended December 31, 2018 2017 2016Cash flows provided by (used in): Operating activities$4,371 $5,482 $4,820Investing activities(3,928) (2,382) (2,006)Financing activities(3,168) (2,272) (2,012)Effect of foreign exchange rate changes on cash(143) 206 (100)Net increase (decrease) in cash and cash equivalents$(2,868) $1,034 $702Cash Flows for the Year Ended December 31, 2018Our operations generated $4.4 billion of cash in 2018, driven primarily by net income of $3.4 billion and noncash charges to income of$2.3 billion, partially offset by a negative change in working capital of $1.3 billion. Noncash charges included $2.1 billion ofdepreciation and amortization expense and $203 million of deferred income tax expense. See “RESULTS OF OPERATIONS” forfurther discussion of our operations. The change in our working capital is detailed in Note 18 of Notes to Consolidated FinancialStatements. The use of cash resulting from the $1.3 billion change in working capital was mainly due to:•an increase in receivables resulting from an increase in sales volumes, partially offset by a decrease in commodity prices;•an increase in inventory primarily due to higher inventory levels;•a decrease in income taxes payable primarily resulting from (i) $527 million of payments in early 2018 related to 2017 taxliabilities and (ii) $181 million of payments in late 2018 that will be applied to 2019 tax liabilities;•a decrease in accrued expenses mainly due to the timing of payments on our environmental compliance program obligations;partially offset by•an increase in accounts payable due to an increase in crude oil and other feedstock volumes purchased, partially offset by adecrease in commodity prices.The $4.4 billion of cash generated by our operations, along with (i) $1.3 billion in proceeds from debt issuances and borrowings and$109 million in proceeds from borrowings of certain VIEs (as discussed in Note 9 of Notes to Consolidated Financial Statements) and(ii) $2.9 billion from available cash on hand, were used mainly to:•fund $2.7 billion in capital investments, which include capital expenditures, deferred turnaround and catalyst costs, andinvestments in joint ventures;•fund (i) $468 million for the Peru Acquisition (as defined and discussed in Note 2 of Notes to Consolidated FinancialStatements) in May 2018; (ii) $320 million for the acquisition of three ethanol plants in November 2018; and (iii) $88 millionfor other minor acquisitions;•fund $124 million of capital expenditures of certain VIEs;•acquire undivided interests in pipeline and terminal assets for $212 million;•redeem our 9.375 percent Senior Notes due March 15, 2019 for $787 million (or 104.9 percent of stated value);•make payments on debt and capital lease obligations of $435 million, of which $410 million related to the repayment of alloutstanding borrowings under VLP’s $750 million senior unsecured revolving credit facility (the VLP Revolver);52Table of Contents•retire $137 million of debt assumed in connection with the Peru Acquisition;•purchase common stock for treasury of $1.7 billion;•pay common stock dividends of $1.4 billion; and•pay distributions to noncontrolling interests of $116 million.Cash 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 detailed in Notes 15 and 18, respectively, of Notes to Consolidated Financial Statements. The source of cash resulting fromthe $1.3 billion change in working capital was mainly due to:•an increase in accounts payable primarily as a result of an increase in commodity prices; and•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; partially offset by•an increase in receivables primarily as a result of an increase in commodity prices; 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 the VLP Revolver as discussed inNote 9 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 a 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 detailed in Note 18 ofNotes to Consolidated Financial Statements. The source of cash resulting from the $976 million change in working capital was mainlydue to:•an increase in accounts payable 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; partially offset by•an increase in receivables primarily as a result of higher commodity prices.53Table of ContentsThe $4.8 billion of cash generated by our operations, along with $2.2 billion in proceeds from debt issuances and borrowings (asdiscussed in Note 9 of Notes to Consolidated Financial Statements), 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 due June 15, 2017 for $778 million (or 103.70 percent of stated value) and our7.2 percent Senior Notes due October 15, 2017 for $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 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.Capital InvestmentsWe define capital investments as capital expenditures for purchases of, additions to, and improvements in our property, plant, andequipment; turnaround and catalyst costs; and investments in joint ventures. Capital expenditures include the capital expenditures of ourconsolidated subsidiaries and consolidated VIEs in which we hold an ownership interest.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 both 2019 and 2020, we expect to incur approximately $2.5 billion for capital investments, consisting of approximately 60 percentfor sustaining capital and 40 percent for growth strategies. However, we continuously evaluate our capital budget and make changes asconditions warrant. This capital investment estimate excludes potential strategic acquisitions, including acquisitions of undividedinterests.54Table of ContentsIn addition to our capital investments noted above, we separately reflect in our statements of cash flows the capital expenditures ofcertain VIEs that we consolidate even though we do not hold an ownership interest in them. These expenditures are not included in our$2.5 billion estimate of capital investments for 2019 or 2020. See Note 12 of Notes to Consolidated Financial Statements for adescription of our VIEs.Other Matters Impacting Liquidity and Capital ResourcesMerger with VLPOn January 10, 2019, we completed our acquisition of all of the outstanding publicly held common units of VLP pursuant to theMerger Transaction with VLP. Upon completion of the Merger Transaction, each outstanding publicly held common unit was convertedinto the right to receive $42.25 per common unit in cash without any interest thereon, and all such publicly traded common units wereautomatically canceled and ceased to exist. Upon completion of the Merger Transaction, we paid aggregate merger consideration of$950 million, which was funded with available cash on hand. See Note 2 of Notes to Consolidated Financial Statements for a discussionof the Merger Transaction.Stock Purchase ProgramsOn January 23, 2018, our board of directors authorized the 2018 Program, which authorized our purchase of up to an additional$2.5 billion of our outstanding common stock with no expiration date. This authorization was in addition to the remaining amountavailable under a $2.5 billion program authorized under the 2016 Program. During the fourth quarter of 2018, we completed ourpurchases under the 2016 Program. As of December 31, 2018, we had $2.2 billion remaining available for purchase under the 2018Program. We have no obligation to make purchases under this program.Pension Plan FundingWe plan to contribute approximately $35 million to our pension plans and $21 million to our other postretirement benefit plans during2019. See Note 13 of Notes to Consolidated Financial Statements for a discussion of our employee benefit plans.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 8 and 10 of Notes to Consolidated Financial Statements for a discussion ofour environmental matters.Tax MattersThe IRS has ongoing audits related to our U.S. federal income tax returns from 2010 through 2015. We have received Revenue AgentReports in connection with the 2010 and 2011 combined audit. We have made significant progress in resolving this audit, which webelieve will be settled within the next 12 months. Upon settlement, we anticipate receiving a refund; therefore, we have a receivable of$336 million associated with this audit as of December 31, 2018. We do not expect to have a significant change to our uncertain taxpositions upon the settlement of our ongoing audits, and we believe that the ultimate settlement of our audits will not be material to ourfinancial position, results of operations, or liquidity.55Table of ContentsCash Held by Our International SubsidiariesIn conjunction with our implementation of the provisions under Tax Reform, as described in Note 15 of Notes to ConsolidatedFinancial Statements, we recorded a liability of $740 million for the estimated U.S. federal tax due on the deemed repatriation of theaccumulated earnings and profits of our international subsidiaries not previously distributed to us, and we will pay this liability over theeight-year period permitted by the provisions under Tax Reform. Because of the deemed repatriation of these accumulated earnings andprofits, there are no longer any U.S. federal income tax consequences associated with the repatriation of any of the $2.4 billion of cashand cash equivalents held by our international subsidiaries as of December 31, 2018. However, certain countries in which ourinternational subsidiaries are organized impose withholding taxes on cash distributed outside of those countries. We have accrued forwithholding taxes on the portion of the cash held by one of our international subsidiaries that we have deemed not to be permanentlyreinvested in our operations in that country. The remaining cash held by that subsidiary, as well as our other international subsidiaries,will be permanently reinvested in our operations in those countries.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.OFF-BALANCE SHEET ARRANGEMENTSWe have not entered into any transactions, agreements, or other contractual arrangements that would result in off-balance sheetliabilities.CONTRACTUAL OBLIGATIONSOur contractual obligations as of December 31, 2018 are summarized below (in millions). Payments Due by Year 2019 2020 2021 2022 2023 Thereafter TotalDebt and capitallease obligations (a)$283 $920 $77 $69 $85 $8,431 $9,865Operating lease obligations359 245 178 146 123 514 1,565Purchase obligations14,853 2,309 1,630 1,407 1,320 4,333 25,852Other long-term liabilities— 249 232 235 261 1,890 2,867Total$15,495 $3,723 $2,117 $1,857 $1,789 $15,168 $40,149______________________________(a)Debt obligations exclude amounts related to unamortized discounts and debt issuance costs. Capital lease obligations include related interest expense.Debt and Capital Lease ObligationsOur debt and capital lease obligations are described in Note 9 of Notes to Consolidated Financial Statements.56Table of ContentsOur 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 as of December 31,2018 are at or above investment grade level as follows: RatingRating Agency Valero VLPMoody’s Investors Service Baa2 (stable outlook) Baa3 (no outlook)Standard & Poor’s Ratings Services BBB (stable outlook) BBB- (no outlook)Fitch Ratings BBB (stable outlook) BBB- (no outlook)In January 2019, after the completion of the Merger Transaction as described in Note 2 of Notes to Consolidated Financial Statements,each of the rating agencies upgraded its rating of VLP’s senior unsecured debt to our rating. The rating change follows the full andunconditional guarantee by us of VLP’s senior notes.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 long-term operating lease commitments include leases for land and office facilities; time charters for ocean-going tankers andcoastal vessels; railcars; facilities and equipment related to industrial gases and power used in our operations; machinery and equipmentused in our refining and ethanol operations; and various facilities and equipment used in the storage, transportation, production, andsale of refinery feedstock, refined petroleum product and corn inventories. Operating lease obligations include all operating leases thathave initial or remaining noncancelable terms in excess of one year, and are not reduced by minimum rentals to be received by usunder 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, or variable price provisions, and (iii) the approximatetiming of the transaction. We have various purchase obligations under certain crude oil and other feedstock supply arrangements,industrial gas supply arrangements (such as hydrogen supply arrangements), natural gas supply arrangements, and various throughput,transportation and terminaling agreements. We enter into these contracts to ensure an adequate supply of feedstock and utilities andadequate storage capacity to operate our refineries and ethanol plants. Substantially all of our purchase obligations are based on marketprices or adjustments based on market indices. Certain of these purchase obligations include fixed or minimum volume requirements,while others are based on our usage requirements. The purchase obligation amounts shown in the preceding table include both short-and long-term obligations and are based on (i) fixed or minimum quantities to be purchased and (ii) fixed or estimated prices to be paidbased on current market conditions.57Table of ContentsOther Long-Term LiabilitiesOur other long-term liabilities are described in Note 8 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, 2018.NEW ACCOUNTING PRONOUNCEMENTSAs discussed in Note 1 of Notes to Consolidated Financial Statements, certain new financial accounting pronouncements becameeffective January 1, 2019, or will become effective in the future. The effect on our financial statements upon adoption of thesepronouncements is discussed in the above-referenced note.CRITICAL 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.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 could result in changes to required operating permits, additional remedial actions, or increased capital expenditures andoperating 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, 2018 and 2017 are included in Note 8 of Notes toConsolidated Financial Statements.Unrecognized Tax BenefitsWe take tax positions in our tax returns from time to time that may not be ultimately allowed by the relevant taxing authority. When wetake such positions, we evaluate the likelihood of sustaining those positions and determine the amount of tax benefit arising from suchpositions, if any, that should be recognized in our financial statements. Tax benefits not recognized by us are recorded as a liability inour balance sheets and58Table of Contentsthat liability represents our potential future obligation to the taxing authorities if the tax position is not sustained.The evaluation of tax positions and the determination of the benefit arising from such positions that are recognized in our financialstatements requires us to make significant judgments and estimates based on an analysis of complex tax laws and regulations andrelated interpretations. These judgments and estimates are subject to change due to many factors, including the progress of ongoing taxaudits, case law, and changes in legislation.Our unrecognized tax benefits as of December 31, 2018 and 2017, along with other information about our unrecognized tax benefits,are included in Note 15 of Notes to Consolidated Financial Statements.Pension 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 13 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, 2018 was 9.38 percent. The actual return on assets for the years ended December 31, 2018, 2017, and 2016 was(5.53) percent, 19.31 percent, and 7.77 percent, respectively. These assumptions can have a significant effect on the amounts reportedin our financial statements. The following sensitivity analysis shows the effects on the projected benefit obligation as of December 31,2018 and net periodic benefit cost for the year ending December 31, 2019 (in millions): PensionBenefits OtherPostretirementBenefitsIncrease in projected benefit obligation resulting from: Discount rate decrease of 0.25%$104 $8Compensation rate increase of 0.25%12 n/aIncrease in expense resulting from: Discount rate decrease of 0.25%9 1Expected return on plan assets decrease of 0.25%6 n/aCompensation rate increase of 0.25%3 n/aOur net periodic benefit cost is determined using the spot-rate approach. Under this approach, our net periodic benefit cost is impactedby the spot rates of the corporate bond yield curve used to calculate our liability discount rate. If the yield curve were to flatten entirelyand our liability discount rate remained unchanged, our net periodic benefit cost would increase by $10 million for pension benefits and$1 million for other postretirement benefits in 2019.See Note 13 of Notes to Consolidated Financial Statements for a discussion of our pension and other postretirement benefit obligations.59Table of ContentsInventory 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 petroleum products, whichrequires us to make estimates regarding the refined petroleum products expected to be produced from those feedstocks and theconversion costs required to convert those feedstocks into refined petroleum products. We also estimate the usual and customarytransportation costs required to move the inventory from our refineries and ethanol plants to the appropriate points of sale. We thenapply an estimated selling price to our inventories. If the aggregate market value is less than cost, we recognize a loss for the differencein our statements of income.The lower of cost or market inventory valuation adjustment for the year ended December 31, 2016 is discussed in Note 5 of Notes toConsolidated Financial Statements.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 futures and options to manage the volatilityof:•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.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.The following sensitivity analysis includes all of our derivative instruments entered into for purposes other than trading with which wehave market risk (in millions): December 31, 2018 2017Gain (loss) in fair value resulting from: 10% increase in underlying commodity prices$2 $(43)10% decrease in underlying commodity prices(6) 4560Table of ContentsSee Note 20 of Notes to Consolidated Financial Statements for notional volumes associated with these derivative contracts as ofDecember 31, 2018.COMPLIANCE PROGRAM PRICE RISKWe are exposed to market risk related to the volatility in the price of credits needed to comply with various governmental andregulatory environmental compliance programs. To manage this risk, we enter into contracts to purchase these credits when prices aredeemed favorable. Some of these contracts are derivative instruments; however, we elect the normal purchase exception and do notrecord these contracts at their fair values. As of December 31, 2018 and 2017, the amount of gain or loss in the fair value of derivativeinstruments that would have resulted from a 10 percent increase or decrease in the underlying price of the contracts was not material.See Note 20 of Notes to Consolidated Financial Statements for a discussion about these compliance programs.INTEREST RATE RISKThe following table provides information about our debt instruments (dollars in millions), the fair values of which are sensitive tochanges in interest rates. Principal cash flows and related weighted-average interest rates by expected maturity dates are presented. December 31, 2018 Expected Maturity Dates 2019 2020 2021 2022 2023 There-after Total (a) FairValueFixed rate$— $850 $10 $— $— $7,474 $8,334 $8,737Average interest rate—% 6.1% 5% —% —% 5.4% 5.5% Floating rate (b)$214 $5 $5 $5 $20 $— $249 $249Average interest rate4.6% 4.7% 4.7% 4.7% 4.7% —% 4.6% December 31, 2017 Expected Maturity Dates 2018 2019 2020 2021 2022 There-after Total (a) FairValueFixed rate$— $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% ________________________(a)Excludes unamortized discounts and debt issuance costs.(b)As of December 31, 2018 and 2017, we had an interest rate swap associated with $40 million and $49 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, 2018, we had commitments to purchase $441 million of U.S. dollars. Our market risk was minimal on thesecontracts, as all of them matured on or before January 31, 2019.61Table 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, 2018. 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, 2018, 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 64 of this report.62Table 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, 2018 and 2017, the related consolidated statements of income, comprehensive income, equity, and cash flows for eachof the years in the three-year period ended December 31, 2018, 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, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three-yearperiod ended December 31, 2018, 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, 2018, 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, 2019 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, 201963Table 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, 2018, 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, 2018, 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, 2018 and 2017, 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, 2018, and the relatednotes (collectively, the consolidated financial statements), and our report dated February 28, 2019 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 financial64Table 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, 201965Table of ContentsVALERO ENERGY CORPORATIONCONSOLIDATED BALANCE SHEETS(millions of dollars, except par value) December 31, 2018 2017ASSETS Current assets: Cash and cash equivalents$2,982 $5,850Receivables, net7,345 6,922Inventories6,532 6,384Prepaid expenses and other816 156Total current assets17,675 19,312Property, plant, and equipment, at cost42,473 40,010Accumulated depreciation(13,625) (12,530)Property, plant, and equipment, net28,848 27,480Deferred charges and other assets, net3,632 3,366Total assets$50,155 $50,158LIABILITIES AND EQUITY Current liabilities: Current portion of debt and capital lease obligations$238 $122Accounts payable8,594 8,348Accrued expenses630 712Taxes other than income taxes payable1,213 1,321Income taxes payable49 568Total current liabilities10,724 11,071Debt and capital lease obligations, less current portion8,871 8,750Deferred income tax liabilities4,962 4,708Other long-term liabilities2,867 2,729Commitments 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 capital7,048 7,039Treasury stock, at cost;255,905,051 and 239,603,534 common shares(14,925) (13,315)Retained earnings31,044 29,200Accumulated other comprehensive loss(1,507) (940)Total Valero Energy Corporation stockholders’ equity21,667 21,991Noncontrolling interests1,064 909Total equity22,731 22,900Total liabilities and equity$50,155 $50,158See Notes to Consolidated Financial Statements.66Table of ContentsVALERO ENERGY CORPORATIONCONSOLIDATED STATEMENTS OF INCOME(millions of dollars, except per share amounts) Year Ended December 31, 2018 2017 2016Revenues (a)$117,033 $93,980 $75,659Cost of sales: Cost of materials and other104,732 83,037 65,962Operating expenses (excluding depreciation and amortizationexpense reflected below)4,690 4,504 4,251Depreciation and amortization expense2,017 1,934 1,846Lower of cost or market inventory valuation adjustment— — (747)Total cost of sales111,439 89,475 71,312Other operating expenses45 61 —General and administrative expenses (excluding depreciation andamortization expense reflected below)925 829 709Depreciation and amortization expense52 52 48Asset impairment loss— — 56Operating income4,572 3,563 3,534Other income, net130 112 94Interest and debt expense, net of capitalized interest(470) (468) (446)Income before income tax expense (benefit)4,232 3,207 3,182Income tax expense (benefit)879 (949) 765Net income3,353 4,156 2,417Less: Net income attributable to noncontrolling interests231 91 128Net income attributable to Valero Energy Corporation stockholders$3,122 $4,065 $2,289 Earnings per common share$7.30 $9.17 $4.94Weighted-average common shares outstanding (in millions)426 442 461 Earnings per common share – assuming dilution$7.29 $9.16 $4.94Weighted-average common shares outstanding –assuming dilution (in millions)428 444 464_______________________________________________ Supplemental information: (a) Includes excise taxes on sales by certain of our internationaloperations$5,626 $5,573 $5,493See Notes to Consolidated Financial Statements.67Table of ContentsVALERO ENERGY CORPORATIONCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(millions of dollars) Year Ended December 31, 2018 2017 2016Net income$3,353 $4,156 $2,417Other comprehensive income (loss): Foreign currency translation adjustment(517) 514 (415)Net gain (loss) on pensionand other postretirement benefits49 (65) (98)Other comprehensive income (loss) beforeincome tax expense (benefit)(468) 449 (513)Income tax expense (benefit) related toitems of other comprehensive income (loss)10 (21) (37)Other comprehensive income (loss)(478) 470 (476)Comprehensive income2,875 4,626 1,941Less: Comprehensive income attributableto noncontrolling interests229 91 129Comprehensive income attributable toValero Energy Corporation stockholders$2,646 $4,535 $1,812See Notes to Consolidated Financial Statements.68Table of ContentsVALERO ENERGY CORPORATIONCONSOLIDATED STATEMENTS OF EQUITY(millions of dollars) Valero Energy Corporation Stockholders’ Equity CommonStock AdditionalPaid-inCapital TreasuryStock RetainedEarnings AccumulatedOtherComprehensiveLoss Total Non-controllingInterests TotalEquityBalance as of December 31, 2015$7 $7,064 $(10,799) $25,188 $(933) $20,527 $827 $21,354Net income— — — 2,289 — 2,289 128 2,417Dividends on common stock($2.40 per share)— — — (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($2.80 per share)— — — (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 programs— — (1,307) — — (1,307) — (1,307)Issuance of Valero Energy Partners LPcommon units— — — — — — 33 33Contributions from noncontrolling interests— — — — — — 30 30Distributions to noncontrolling interests— — — — — — (67) (67)Other— (35) — 11 — (24) (8) (32)Other comprehensive income— — — — 470 470 — 470Balance as of December 31, 20177 7,039 (13,315) 29,200 (940) 21,991 909 22,900Reclassification of stranded income taxeffects of Tax Reform per ASU 2018-02(see Note 1)— — — 91 (91) — — —Net income— — — 3,122 — 3,122 231 3,353Dividends on common stock($3.20 per share)— — — (1,369) — (1,369) — (1,369)Stock-based compensation expense— 82 — — — 82 — 82Transactions in connection withstock-based compensation plans— (70) (99) — — (169) — (169)Stock purchases under purchase programs— — (1,511) — — (1,511) — (1,511)Contributions from noncontrolling interests— — — — — — 32 32Distributions to noncontrolling interests— — — — — — (116) (116)Other— (3) — — — (3) 10 7Other comprehensive loss— — — — (476) (476) (2) (478)Balance as of December 31, 2018$7 $7,048 $(14,925) $31,044 $(1,507) $21,667 $1,064 $22,731See Notes to Consolidated Financial Statements.69Table of ContentsVALERO ENERGY CORPORATIONCONSOLIDATED STATEMENTS OF CASH FLOWS(millions of dollars) Year Ended December 31, 2018 2017 2016Cash flows from operating activities: Net income$3,353 $4,156 $2,417Adjustments to reconcile net income to net cash provided byoperating activities: Depreciation and amortization expense2,069 1,986 1,894Lower of cost or market inventory valuation adjustment— — (747)Asset impairment loss— — 56Deferred income tax expense (benefit)203 (2,543) 230Changes in current assets and current liabilities(1,297) 1,289 976Changes in deferred charges and credits andother operating activities, net43 594 (6)Net cash provided by operating activities4,371 5,482 4,820Cash flows from investing activities: Capital expenditures(1,628) (1,353) (1,278)Deferred turnaround and catalyst costs(915) (523) (718)Investments in joint ventures(181) (406) (4)Capital expenditures of certain variable interest entities (VIEs)(124) (26) —Peru Acquisition, net of cash acquired(468) — —Acquisition of ethanol plants(320) — —Acquisitions of undivided interests(212) (72) —Minor acquisitions(88) — —Other investing activities, net8 (2) (6)Net cash used in investing activities(3,928) (2,382) (2,006)Cash flows from financing activities: Proceeds from debt issuances and borrowings (excludingborrowings of certain VIEs)1,258 380 2,153Proceeds from borrowings of certain VIEs109 — —Repayments of debt and capital lease obligations(1,359) (21) (1,475)Purchases of common stock for treasury(1,708) (1,372) (1,336)Common stock dividends(1,369) (1,242) (1,111)Contributions from noncontrolling interests32 30 —Distributions to noncontrolling interests(116) (67) (65)Other financing activities, net(15) 20 (178)Net cash used in financing activities(3,168) (2,272) (2,012)Effect of foreign exchange rate changes on cash(143) 206 (100)Net increase (decrease) in cash and cash equivalents(2,868) 1,034 702Cash and cash equivalents at beginning of year5,850 4,816 4,114Cash and cash equivalents at end of year$2,982 $5,850 $4,816See Notes to Consolidated Financial Statements.70Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS1.DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION, AND SIGNIFICANT ACCOUNTING POLICIESDescription of BusinessThe terms “Valero,” “we,” “our,” and “us,” as used in this report, may refer to Valero Energy Corporation, one or more of itsconsolidated subsidiaries, 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, 2018. We sell our refined petroleum products in both the wholesale rack and bulk markets, and approximately7,000 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 12 for further information about VLP.We also own 14 ethanol plants in the Mid-Continent region of the U.S. with a combined production capacity of approximately1.73 billion gallons per year as of December 31, 2018. 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).ReclassificationsCertain prior year amounts have been reclassified to conform to the 2018 presentation. The changes were primarily due to ourretrospective adoption on January 1, 2018 of Accounting Standards Update (ASU) No. 2017-07, “Compensation—Retirement Benefits(Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” This ASU requiresemployers to report the service cost component of net periodic pension cost and net periodic postretirement benefit cost in the same lineitem as other compensation costs arising from services rendered by the pertinent employees during the period. It also requires the othercomponents of net periodic pension cost and net periodic postretirement benefit cost (non-service cost components) to be presented inthe income statement separately from the service cost component and outside a subtotal of income from operations. The adoption ofthis ASU did not affect our financial position or results of operations, but resulted in the reclassification of the non-service componentsof pension and postretirement benefit costs from operating expenses (excluding depreciation and amortization expense) and generaland administrative expenses (excluding depreciation and amortization expense) to other income, net. This resulted in an increase of$42 million and $44 million in operating expenses (excluding depreciation and amortization expense) and a decrease of $6 million and$6 million in general and administrative expenses (excluding depreciation and amortization expense) for the years ended December 31,2017 and 2016, respectively.Significant Accounting PoliciesPrinciples of ConsolidationThese financial statements include those of Valero, our wholly owned subsidiaries, and VIEs in which we have a controlling interest.Our VIEs are described in Note 12. The ownership interests held by others in the VIEs are recorded as noncontrolling interests.Intercompany items and transactions have been eliminated in71Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)consolidation. Investments in less than wholly owned entities where we have significant influence are accounted for using the equitymethod.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.Cash EquivalentsOur cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and have amaturity 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 a72Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)separate composite group of property assets for each of our refineries. We estimate the useful life of each group based on an evaluationof the property assets comprising the group, and such evaluations consist of, but are not limited to, the physical inspection of the assetsto determine their condition, consideration of the manner in which the assets are maintained, assessment of the need to replace assets,and evaluation of the manner in which improvements impact the useful life of the group. The estimated useful lives of our compositegroups range primarily from 25 to 30 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 our refineries in accordance with engineeringspecifications, design standards, and practices accepted in our industry, and these improvements have design lives consistent with ourestimated useful lives. Therefore, we believe the use of the group life to depreciate the cost of improvements made to the group isreasonable because the estimated useful life of each improvement is consistent with that of 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;73Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)•intangible assets; and•goodwill.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.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.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 obligations with respect to certain of our assets related to our refining and ethanol segments to clean and/or dispose of variouscomponent parts of the assets at the time they are retired. However, these component parts can be used for extended and indeterminateperiods of time as long as they are properly maintained and/or upgraded. It is our practice and current intent to maintain all our assetsand continue making improvements to those assets based on technological advances. As a result, we believe that our assets related toour refining and ethanol segments have indeterminate lives for purposes of estimating asset retirement obligations because dates orranges of dates upon which we would retire such assets cannot reasonably be estimated at this time. We will recognize a liability at suchtime when sufficient information exists to estimate a date or range of potential settlement dates that is needed to employ a present valuetechnique to estimate fair value.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.74Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Legal ContingenciesWe are subject to legal proceedings, claims, and liabilities that arise in the ordinary course of business. We accrue losses associated withlegal claims when such losses are probable and reasonably estimable. If we determine that a loss is probable and cannot estimate aspecific amount for that loss but can estimate a range of loss, the best estimate within the range is accrued. If no amount within therange is a better estimate than any other, the minimum amount of the range is accrued. Estimates are adjusted as additional informationbecomes available or circumstances change. Legal defense costs associated with loss contingencies are expensed in the period incurred.Foreign Currency TranslationGenerally, our international subsidiaries use their local currency as their functional currency. Balance sheet amounts are translated intoU.S. dollars using exchange rates in effect as of the balance sheet date. Income statement amounts are translated into U.S. dollars usingthe exchange rates in effect at the time the underlying transactions occur. Foreign currency translation adjustments are recorded as acomponent of accumulated other comprehensive loss.Revenue RecognitionOur revenues are primarily generated from contracts with customers. We generate revenue from contracts with customers from the saleof products by our refining and ethanol segments. Our VLP segment generates intersegment revenues from transportation andterminaling activities provided to our refining segment that are eliminated in consolidation. Revenues are recognized when we satisfyour performance obligation to transfer products to our customers, which typically occurs at a point in time upon shipment or delivery ofthe products, and for an amount that reflects the transaction price that is allocated to the performance obligation.The customer is able to direct the use of, and obtain substantially all of the benefits from, the products at the point of shipment ordelivery. As a result, we consider control to have transferred upon shipment or delivery because we have a present right to payment atthat time, the customer has legal title to the asset, we have transferred physical possession of the asset, and the customer has significantrisks and rewards of ownership of the asset.Our contracts with customers state the final terms of the sale, including the description, quantity, and price for goods sold. Payment istypically due in full within two to ten days of delivery. In the normal course of business, we generally do not accept product returns.The transaction price is the consideration that we expect to be entitled to in exchange for our products. The transaction price forsubstantially all of our contracts is generally based on commodity market pricing (i.e., variable consideration). As such, this marketpricing may be constrained (i.e., not estimable) at the inception of the contract but will be recognized based on the applicable marketpricing, which will be known upon transfer of the goods to the customer. Some of our contracts also contain variable consideration inthe form of sales incentives to our customers, such as discounts and rebates. For contracts that include variable consideration, weestimate the factors that determine the variable consideration in order to establish the transaction price.75Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)We have elected to exclude from the measurement of the transaction price all taxes assessed by governmental authorities that are bothimposed on and concurrent with a specific revenue-producing transaction and collected by us from a customer (e.g., sales tax, use tax,value-added tax, etc.). We continue to include in the transaction price excise taxes that are imposed on certain inventories in ourinternational operations. The amount of such taxes is provided in supplemental information in a footnote on the statements of income.There are instances where we provide shipping services in relation to the goods sold to our customer. Shipping and handling costs thatoccur before the customer obtains control of the goods are deemed to be fulfillment activities and are included in cost of materials andother. We have elected to account for shipping and handling activities that occur after the customer has obtained control of a good asfulfillment activities rather than as a promised service and we have included these activities in cost of materials and other.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 nonmonetaryassets, 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 19); (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 17.“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 regulations76Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)that require us to blend a certain percentage of biofuels into the products we produce. To the degree that we are unable to blendbiofuels at the required percentage, we must purchase biofuel credits to meet our obligation. We purchase greenhouse gas (GHG)emission credits to comply with government regulations concerning various GHG emission programs, including cap-and-trade systems.These programs are described in Note 20 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 19 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 (i) the requisite service period of each award or (ii) 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. Stranded income tax effects arereleased from accumulated other comprehensive loss to retained earnings on an individual item basis as those items are reclassified intoincome.We have elected to classify any interest expense and penalties related to the underpayment of income taxes in income tax expense.We have elected to treat the global intangible low-taxed income (GILTI) tax as a period 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 securities are included in the computation of basic earnings per share using thetwo-class method. Earnings per common share – assuming dilution is computed by dividing net income attributable to Valerostockholders by the weighted-average number of common shares outstanding for the year increased by the effect of dilutive securities.Potentially dilutive securities are excluded from the computation of earnings per common share – assuming dilution when the effect ofincluding such shares would be antidilutive.Financial InstrumentsOur financial instruments include cash and cash equivalents, receivables, payables, debt, capital lease obligations, commodityderivative contracts, and foreign currency derivative contracts. The estimated fair77Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)values of these financial instruments approximate their carrying amounts, except for certain debt as discussed in Note 19.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 in income. To manage commodity price risk, we useeconomic hedges, which are derivative instruments not designated as fair value or cash flow hedges, and we also use fair value andcash flow hedges from time to time. The cash flow effects of all of our derivative instruments are reflected in operating activities in thestatements of cash flows.Accounting Pronouncements Adopted During 2018Topic 606On January 1, 2018, we adopted the provisions of Accounting Standards Codification (ASC) Topic 606, “Revenue from Contracts withCustomers,” (Topic 606). This standard clarifies the principles for recognizing revenue and supersedes previous revenue recognitionrequirements under “Revenue Recognition (Topic 605).” We adopted the provisions of Topic 606 using the modified retrospectivemethod of adoption as permitted by the standard. Under this method, the cumulative effect of initially applying the standard isrecognized as an adjustment to the opening balance of retained earnings, and revenues reported in the periods prior to the date ofadoption are not changed. We elected to apply the transition guidance for Topic 606 only to contracts that were not completed as of thedate of adoption. There was no material impact to our financial position as a result of adopting Topic 606; therefore, there was nocumulative-effect adjustment to retained earnings as of January 1, 2018, and there was no material impact to our financial statements asof and for the year ended December 31, 2018. Our revenue recognition accounting policy described above has been updated inconjunction with our adoption of Topic 606, but our previous policy has been omitted because the adoption of Topic 606 had nomaterial impact to us as previously described.ASU No. 2016-01On January 1, 2018, we adopted the provisions of ASU No. 2016-01, “Financial Instruments—Overall (Subtopic 825-10): Recognitionand Measurement of Financial Assets and Financial Liabilities.” This ASU enhances the reporting model for financial instrumentsregarding certain aspects of recognition, measurement, presentation, and disclosure. We adopted the provisions of this ASU using thecumulative-effect method of adoption as required by the ASU. The adoption of this ASU did not affect our financial position or ourresults of operations as of or for the year ended December 31, 2018, but resulted in reduced disclosures as it eliminated the requirementto disclose the methods and significant assumptions used to estimate the fair value of financial instruments.ASU No. 2017-04Effective October 1, 2018, we early adopted the provisions of ASU No. 2017-04, “Intangibles—Goodwill and Other (Topic 350):Simplifying the Test for Goodwill Impairment.” This ASU simplifies the subsequent measurement of goodwill by eliminating Step 2from the goodwill impairment test. Under the provisions of this ASU, an entity should perform its annual, or interim, goodwillimpairment test by comparing the fair value of a reporting unit with its carrying amount, including goodwill, and should recognize animpairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. However, the impairmentcharge should not exceed the carrying amount of goodwill allocated to that reporting unit. An78Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test isnecessary. The adoption of this ASU did not affect our financial position or results of operations and did not result in additionaldisclosures because it is applied prospectively to impairment tests performed after the date of adoption.ASU No. 2017-09On January 1, 2018, we adopted the provisions of ASU No. 2017-09, “Compensation—Stock Compensation (Topic 718): Scope ofModification Accounting.” This ASU reduces diversity in practice, as well as reduces cost and complexity regarding a change to theterms or conditions of a share-based payment award. The adoption of this ASU did not have an immediate effect on our financialposition or results of operations as it is applied prospectively to an award modified on or after adoption.ASU No. 2018-02On January 1, 2018, we adopted the provisions of ASU No. 2018-02, “Income Statement—Reporting Comprehensive Income(Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,” (ASU No. 2018-02). This ASUallows for the stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 (Tax Reform) to be reclassified from accumulatedother comprehensive income to retained earnings. We elected to reclassify the stranded income tax effects resulting from Tax Reformfrom accumulated other comprehensive income to retained earnings as of the beginning of the interim period of adoption. The adoptionof this ASU did not affect our financial position or results of operations but resulted in the reclassification of $91 million of income taxbenefits related to Tax Reform from accumulated other comprehensive loss to retained earnings as of January 1, 2018 as presented inour statement of equity and in Note 11 under “Accumulated Other Comprehensive Loss.”ASU No. 2018-05In March 2018, the Financial Accounting Standards Board (FASB) issued ASU No. 2018-05, “Income Taxes (Topic 740): Amendmentsto SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118,” (ASU No. 2018-05) to amend certain SEC material inTopic 740 for the income tax accounting implications of the recently issued Tax Reform. This guidance clarifies the application ofTopic 740 in situations where a registrant does not have the necessary information available, prepared, or analyzed in reasonable detailto complete the accounting under Topic 740 for certain income tax effects of Tax Reform for the reporting period in which Tax Reformwas enacted. See Note 15 for a discussion of the impact of this ASU.ASU No. 2018-13Effective October 1, 2018, we adopted all of the provisions of ASU No. 2018-13, “Fair Value Measurement (Topic 820): DisclosureFramework—Changes to the Disclosure Requirements for Fair Value Measurement.” This ASU improves the effectiveness ofdisclosures in the notes to financial statements by removing, modifying, and adding certain disclosure requirements for fair valuemeasurements. We are no longer required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fairvalue hierarchy, but are required to disclose the range and weighted average of significant unobservable inputs used to develop Level 3fair value measurements. Certain provisions of this ASU, primarily related to disclosures, require the prospective method of adoption,with the remaining provisions applied retrospectively. The early adoption of this ASU did not affect our financial position or results ofoperations, but resulted in revised disclosures as discussed above.79Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)ASU No. 2018-14Effective December 31, 2018, we adopted the provisions of ASU No. 2018-14, “Compensation—Retirement Benefits—Defined BenefitPlans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans.” ThisASU improves the effectiveness of disclosures in the notes to financial statements by removing, modifying, and adding certaindisclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. We are no longer required todisclose the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit costover the next fiscal year, but we are required to (i) disclose the weighted-average interest crediting rates for cash balance plans andother plans with promised interest crediting rates and (ii) provide an explanation of the reasons for significant gains and losses related tochanges in the benefit obligation for the period. The early adoption of this ASU did not affect our financial position or results ofoperations, but resulted in revised disclosures as discussed above.Accounting Pronouncements Adopted on January 1, 2019Topic 842In February 2016, the FASB issued ASC Topic 842, “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 reporting periods, with early adoption permitted. We adopted this new standard on January 1, 2019 usingthe optional transition method; however, we did not have a cumulative-effect adjustment to the opening balance of retained earnings atthe date of adoption as noted below, but we will apply the new disclosure requirements beginning in 2019.The new standard provides a number of optional practical expedients and we elected the following:•Transition Elections. We elected the package of practical expedients that permits us to not reassess our prior conclusions aboutlease identification, lease classification, and initial direct costs under the new standard, as well as the practical expedient thatpermits us to not assess existing land easements under the new standard.•Lessee Accounting Policy Elections. We elected the short-term lease recognition exemption whereby right-of-use (ROU) assetsand lease liabilities are not recognized for leasing arrangements with terms less than one year, and the practical expedient to notseparate lease and non-lease components for all classes of underlying assets other than the marine transportation asset class.In preparation for the adoption of Topic 842, we enhanced our contracting and lease evaluation systems and related processes, and wedeveloped a new lease accounting system to capture our leases and support the required disclosures. We have integrated our leaseaccounting system with our general ledger and modified our related procurement and payment processes.Adoption of this standard resulted in (i) the recognition of ROU assets and lease liabilities for our operating leases of approximately$1.3 billion, (ii) the derecognition of existing assets under construction of approximately $539 million related to a build-to-suit leasearrangement (see Note 10 under “Other Commitments—MVP Terminal”), and (iii) the presentation of new disclosures about our leasingactivities80Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)beginning in the first quarter of 2019. Adoption of this standard did not impact our results of operations or liquidity and our accountingfor finance leases is substantially unchanged.ASU No. 2017-12In August 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting forHedging Activities,” (ASU No. 2017-12) to improve and simplify accounting guidance for hedge accounting. The provisions of thisASU are effective for annual reporting periods beginning after December 15, 2018, and interim reporting periods within those annualreporting periods, with early adoption permitted. Certain provisions of this ASU, primarily related to disclosures, require the prospectivemethod of adoption, with the remaining provisions applied through a cumulative-effect adjustment to retained earnings as of theadoption date. The adoption of ASU No. 2017-12 effective January 1, 2019 did not affect our financial position or results of operations.Accounting Pronouncements Not Yet AdoptedASU No. 2016-13In June 2016, the FASB issued “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on FinancialInstruments,” (ASU No. 2016-13) to improve financial reporting by requiring the immediate recognition of credit losses on financialinstruments held by a reporting entity. This ASU requires the measurement of all expected credit losses for financial assets held at thereporting date based on historical experience, current conditions, and reasonable and supportable forecasts. It also requires enhanceddisclosures, including qualitative and quantitative requirements that provide additional information about the amounts recorded in thefinancial statements. In November 2018, the FASB issued “Codification Improvements to Topic 326, Financial Instruments—CreditLosses,” (ASU 2018-19), which clarified that this guidance does not apply to receivables arising from operating leases. The provisionsof this ASU are effective for annual reporting periods beginning after December 15, 2019, and interim periods within those annualreporting periods, with early adoption permitted for annual periods beginning after December 15, 2018. The provisions of this ASUshould be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in whichthis ASU is effective (i.e., the modified-retrospective approach). We expect to adopt ASU No. 2016-13 effective January 1, 2020, andwe do not expect such adoption to materially affect our financial position or our results of operations.ASU No. 2018-17In October 2018, the FASB issued ASU No. 2018-17, “Consolidation (Topic 810): Targeted Improvements to Related Party Guidancefor Variable Interest Entities,” (ASU No. 2018-17) to reduce the cost and complexity of financial reporting associated withconsolidation of VIEs. One of the provisions of this ASU amends how a decision maker or service provider determines whether its feeis a variable interest. This guidance requires reporting entities to consider indirect interests held through related parties under commoncontrol on a proportional basis rather than as the equivalent of a direct interest in its entirety (as currently required by U.S. GAAP). Theprovisions of this ASU are effective for annual reporting periods beginning after December 15, 2019, and interim reporting periodswithin those annual reporting periods, with early adoption permitted. The provisions of this ASU should be applied on a retrospectivebasis with a cumulative-effect adjustment to retained earnings as of the beginning of the earliest period presented. We expect to adoptASU No. 2018-17 effective January 1, 2020, and we do not expect such adoption to materially affect our financial position or ourresults of operations.81Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)2.ACQUISITIONS AND MERGERPeru AcquisitionOn May 14, 2018, we acquired 100 percent of the issued and outstanding equity interests in Pure Biofuels del Peru S.A.C. (PureBiofuels) from Pegasus Capital Advisors L.P. and various minority equity holders. Pure Biofuels markets refined petroleum productsthrough its logistics assets in Peru. Pure Biofuels owns a terminal at the Port of Callao, near Lima, with approximately 1 million barrelsof storage capacity for refined petroleum and renewable products. Through one of its subsidiaries, Pure Biofuels also owns a 180,000 -barrel storage terminal in Paita, in northern Peru, which is scheduled to commence operations in the second half of 2019, pendingregulatory approvals. We paid $468 million from available cash on hand, of which $132 million was for working capital. Thisacquisition, which is referred to as the Peru Acquisition, is consistent with our general business strategy and broadens the geographicdiversity of our refining segment. This acquisition was accounted for as a business acquisition.The following table summarizes the fair values of the assets acquired and liabilities assumed at the acquisition date, based on anindependent appraisal that was completed in the fourth quarter of 2018 (in millions). During the third and fourth quarters of 2018, werecognized immaterial adjustments to the preliminary amounts recorded for the Peru Acquisition with a corresponding adjustment togoodwill due to the completion of the independent appraisal. These adjustments did not have a material effect on our results ofoperations for the year ended December 31, 2018.Current assets, net of cash acquired$158Property, plant, and equipment102Deferred charges and other assets466Current liabilities, excluding current portion of debt(26)Debt assumed, including current portion(137)Deferred income tax liabilities(62)Other long-term liabilities(27)Noncontrolling interest(6)Total consideration, net of cash acquired$468Deferred charges and other assets primarily include identifiable intangible assets of $200 million and goodwill of $260 million.Identifiable intangible assets, which consist of customer contracts and relationships, are amortized on a straight-line basis over tenyears. Goodwill is calculated as the excess of the consideration transferred over the estimated fair values of the underlying tangible andidentifiable intangible assets acquired and liabilities assumed. Goodwill represents the future economic benefits expected to berecognized from our expansion into the Latin American refined petroleum products markets arising from other assets acquired that werenot individually identified and separately recognized. We determined that the entire balance of goodwill is related to the refiningsegment. None of the goodwill is deductible for tax purposes.Our statements of income include the results of operations of Pure Biofuels since the date of acquisition, and such results are reflectedin the refining segment. Results of operations since the date of acquisition, supplemental pro forma financial information, andacquisition-related costs have not been presented for the Peru Acquisition as such information is not material to our results ofoperations.82Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Acquisition of Ethanol PlantsOn November 15, 2018, we acquired three ethanol plants from two subsidiaries of Green Plains Inc. for total cash consideration of$320 million including working capital of $20 million. The ethanol plants are located in Bluffton, Indiana; Lakota, Iowa; andRiga, Michigan with a combined ethanol production capacity of 280 million gallons per year. This acquisition was accounted for as anasset acquisition.Merger with VLPOn January 10, 2019, we completed our acquisition of all of the outstanding publicly held common units of VLP pursuant to adefinitive Agreement and Plan of Merger (Merger Agreement, and together with the transactions contemplated thereby, the MergerTransaction) with VLP. Upon completion of the Merger Transaction, each outstanding publicly held common unit was converted intothe right to receive $42.25 per common unit in cash without any interest thereon, and all such publicly traded common units wereautomatically canceled and ceased to exist. Upon completion of the Merger Transaction, we paid aggregate merger consideration of$950 million, which was funded with available cash on hand.We consolidate the financial statements of VLP (see Note 12) and we reflect noncontrolling interests on our balance sheet for theportion of VLP’s partners’ capital held by VLP’s public common unitholders. However, upon completion of the Merger Transaction,VLP became our indirect wholly owned subsidiary and, as a result, we will no longer reflect noncontrolling interests on our balancesheet with respect to VLP. In addition, we will no longer attribute a portion of VLP’s net income to noncontrolling interests. Because wehad a controlling financial interest in VLP before the merger and retained our controlling financial interest in VLP after the merger, thechange in our ownership interest in VLP as a result of the merger was accounted for as an equity transaction. Accordingly, we did notrecognize a gain or loss on the merger.3.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 the83Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)impairment loss at that time because we concluded that it was more likely than not that we would ultimately transfer ownership of theseassets to the GOA as a result of agreements entered into in June 2016 between the GOA, CITGO Aruba Refining N.V. (CAR), andCITGO 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 19 for disclosure related to the method to determine fair value.)4.RECEIVABLESReceivables consisted of the following (in millions): December 31, 2018 2017Receivables from contracts with customers$4,673 $5,686Receivables from certain purchase and sale arrangements2,311 1,098Commodity derivative and foreign currencycontract receivables229 102Other receivables166 69Total receivables7,379 6,955Allowance for doubtful accounts(34) (33)Receivables, net$7,345 $6,922There were no significant changes in our allowance for doubtful accounts during the years ended December 31, 2018, 2017, and 2016. 5.INVENTORIESInventories consisted of the following (in millions): December 31, 2018 2017Refinery feedstocks$2,292 $2,427Refined petroleum products and blendstocks3,678 3,459Ethanol feedstocks and products298 242Materials and supplies264 256Inventories$6,532 $6,384As of December 31, 2018 and 2017, the replacement cost (market value) of LIFO inventories exceeded their LIFO carrying amounts by$1.5 billion and $3.0 billion, respectively, and our non-LIFO inventories accounted for $1.1 billion and $1.0 billion, respectively, ofour 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.84Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)6.PROPERTY, PLANT, AND EQUIPMENTMajor classes of property, plant, and equipment, including assets held under capital leases, consisted of the following (in millions): December 31, 2018 2017Land $416 $411Crude oil processing facilities 30,721 30,109Transportation and terminaling facilities 4,935 4,335Grain processing equipment 1,212 903Administrative buildings 953 910Other 2,276 2,068Construction in progress 1,960 1,274Property, plant, and equipment, at cost 42,473 40,010Accumulated depreciation (13,625) (12,530)Property, plant, and equipment, net $28,848 $27,480Our assets under capital leases are presented in the table above within “Other” and consist of various types of assets that primarilysupport our refining operations and totaled $711 million and $635 million as of December 31, 2018 and 2017, respectively.Accumulated amortization on assets under capital leases was $106 million and $72 million as of December 31, 2018 and 2017,respectively.Depreciation expense for the years ended December 31, 2018, 2017, and 2016 was $1.4 billion, $1.3 billion, and $1.3 billion,respectively.85Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)7.DEFERRED CHARGES AND OTHER ASSETS“Deferred charges and other assets, net” consisted of the following (in millions): December 31, 2018 2017Deferred turnaround and catalyst costs, net$1,749 $1,520Income taxes receivable343 673Investments in joint ventures542 530Intangible assets, net307 142Goodwill260 —Other431 501Deferred charges and other assets, net$3,632 $3,366Amortization expense for the deferred charges and other assets shown above was $668 million, $650 million, and $575 million for theyears ended December 31, 2018, 2017, and 2016, respectively.The increase in intangible assets, net and goodwill resulted primarily from the Peru Acquisition as described in Note 2.8.ACCRUED EXPENSES AND OTHER LONG-TERM LIABILITIESAccrued expenses and other long-term liabilities consisted of the following (in millions): AccruedExpenses Other Long-TermLiabilities December 31, December 31, 2018 2017 2018 2017Defined benefit plan liabilities (see Note 13)$43 $33 $654 $776Wage and other employee-related liabilities302 278 109 111Uncertain income tax position liabilities (see Note 15)— — 721 723Repatriation tax liability (see Note 15) (a)— — 603 597Environmental liabilities (see Note 10)29 30 327 232Environmental credit obligations (see Note 19)34 152 — —Accrued interest expense93 105 — —Other accrued liabilities129 114 453 290Accrued expenses and other long-term liabilities$630 $712 $2,867 $2,729__________________________ (a)The current portion of repatriation tax liability is included in income taxes payable. There was no current portion of repatriation tax liability as ofDecember 31, 2018 and $114 million as of December 31, 2017.86Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)9.DEBT AND CAPITAL LEASE OBLIGATIONSDebt, at stated values, and capital lease obligations consisted of the following (in millions): FinalMaturity December 31, 2018 2017Credit facilities: Valero Revolver2020 $— $—VLP Revolver2020 — 410IEnova Revolver2028 109 —Canadian Revolver2019 — —Accounts receivable sales facility2019 100 100Public debt: Valero Senior Notes 6.625%2037 1,500 1,5003.4%2026 1,250 1,2506.125%2020 850 8504.35 %2028 750 —9.375%2019 — 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 5004.5%2028 500 —Gulf Opportunity Zone Revenue Bonds, Series 2010, 4.0%2040 300 300Debenture, 7.65%2026 100 100Other debtVarious 50 49Net unamortized debt issuance costs and other (80) (73)Total debt 8,503 8,310Capital lease obligations 606 562Total debt and capital lease obligations 9,109 8,872Less current portion 238 122Debt and capital lease obligations, less current portion $8,871 $8,75087Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Credit FacilitiesValero RevolverWe have a $3 billion revolving credit facility (the Valero Revolver) with a group of financial institution lenders that matures inNovember 2020. The Valero Revolver also provides for the issuance of letters of credit of up to $2.0 billion.Outstanding borrowings under the Valero Revolver bear interest, at our option, at either (i) 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 (ii) 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, 2018, 2017, and 2016.VLP RevolverAs of December 31, 2018 and 2017, VLP had a $750 million senior unsecured revolving credit facility (the VLP Revolver) with agroup of lenders that was scheduled to mature in November 2020. However, on January 10, 2019, in connection with the completion ofthe Merger Transaction as described in Note 2, the VLP Revolver was terminated.Outstanding borrowings under the VLP Revolver bore interest, at VLP’s option, at either (i) 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 (ii) the alternate base rate (asdefined in the VLP Revolver) plus the applicable margin. As of December 31, 2017, the variable rate was 2.875 percent. The VLPRevolver required payments for customary fees, including commitment fees, letter of credit participation fees, and administrative agentfees.During the year ended December 31, 2018, VLP repaid the outstanding balance of $410 million on the VLP Revolver using proceedsfrom its public offering of $500 million 4.5 percent Senior Notes as described in “Public Debt” below. During the year endedDecember 31, 2017, VLP borrowed $380 million under the revolver and made no repayments. During the year ended December 31,2016, VLP borrowed $349 million under the revolver and repaid $494 million.IEnova RevolverIn February 2018, Central Mexico Terminals (as described in Note 12) entered into a combined $340 million unsecured revolving creditfacility (IEnova Revolver) with IEnova (defined in Note 12) that matures in February 2028. IEnova may terminate this revolver at anytime and demand repayment of all outstanding amounts; therefore, all outstanding borrowings are reflected in current portion of debt.The IEnova Revolver is available only to the operations of Central Mexico Terminals, and the creditors of Central Mexico Terminals donot have recourse against us.Outstanding borrowings under this revolver bear interest at the three-month LIBO rate for the applicable interest period in effect fromtime to time plus the applicable margin. The interest rate under this revolver88Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)is subject to adjustment, with agreement by both parties, based upon changes in market conditions. As of December 31, 2018, thevariable rate was 6.046 percent.During the year ended December 31, 2018, Central Mexico Terminals borrowed $109 million and had no repayments under thisrevolver.Canadian RevolverIn November 2018, one of our Canadian subsidiaries amended its committed revolving credit facility (the Canadian Revolver) toincrease the borrowing capacity from C$75 million to C$150 million under which it may borrow and obtain letters of credit and toextend the maturity date from November 2018 to November 2019.We had no borrowings or repayments under this revolver during the years ended December 31, 2018, 2017, and 2016.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 2018, we amended our agreement to extend the maturity date to July 2019.Under this program, one of our marketing subsidiaries (Valero Marketing) sells eligible receivables, without recourse, to another of oursubsidiaries (Valero Capital), whereupon the receivables are no longer owned by Valero Marketing. Valero Capital, in turn, sells anundivided percentage ownership interest in the eligible receivables, without recourse, to the third-party entities and financial institutions.To the extent that Valero Capital retains an ownership interest in the receivables it has purchased from Valero Marketing, such interestis included in our financial statements solely as a result of the consolidation of the financial statements of Valero Capital with those ofValero Energy Corporation; the receivables are not available to satisfy the claims of the creditors of Valero Marketing or Valero EnergyCorporation.As of December 31, 2018 and 2017, $1.8 billion and $2.3 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, 2018 and 2017, the variable interest rate on the accounts receivable sales facility was 3.0618 percentand 2.0387 percent, respectively. During the years ended December 31, 2018, 2017, and 2016, we had no proceeds from orrepayments under the accounts receivable sales facility.89Table 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 (amounts in millions andcurrency in U.S. dollars, except as noted): December 31, 2018 FacilityAmount Maturity Date OutstandingBorrowings Letters ofCredit Issued Availability Committed facilities: Valero Revolver $3,000 November 2020 $— $57 $2,943Canadian Revolver C$150 November 2019 C$— C$5 C$145Accounts receivablesales facility $1,300 July 2019 $100 n/a $1,200Letter of credit facility $100 November 2019 n/a $— $100Committed facilities ofVIEs (a): VLP Revolver (b) $750 November 2020 $— $— $750IEnova Revolver $340 February 2028 $109 n/a $231Uncommitted facilities: Letter of credit facilities n/a n/a n/a $229 n/a__________________________ (a)Creditors of our VIEs do not have recourse against us.(b)The VLP Revolver was terminated on January 10, 2019. See “VLP Revolver” above.In November 2018, our committed letter of credit facility was amended to extend the maturity date from November 2018 to November2019.Letters of credit issued as of December 31, 2018 expire at various times in 2019 through 2020.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.Public DebtDuring the year ended December 31, 2018, the following activity occurred:•We issued $750 million of 4.35 percent Senior Notes due June 1, 2028. Proceeds from this debt issuance totaled $749 millionbefore deducting the underwriting discount and other debt issuance costs. The proceeds were used to redeem our 9.375 percentSenior Notes due March 15, 2019 for $787 million, or 104.9 percent of stated value, which includes an early redemption fee of$37 million that is reflected in other income, net.•VLP issued $500 million of 4.5 percent Senior Notes due March 15, 2028. Proceeds from this debt issuance totaled$498 million before deducting the underwriting discount and other debt issuance costs. The proceeds were available only to theoperations of VLP and were used to repay the outstanding balance of $410 million on the VLP Revolver and $85 million on itsnotes payable to90Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)us, which is eliminated in consolidation. On January 10, 2019, in connection with the completion of the Merger Transaction asdescribed in Note 2, Valero entered into a guarantee agreement to fully and unconditionally guarantee the prompt payment,when due, of any amount owed to the holders of these notes.During the year ended December 31, 2017, there was no issuance or redemption activity related to our public debt.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 before deducting the underwriting discount and other debt issuance costs.•We redeemed our 6.125 percent Senior Notes due June 15, 2017 for $778 million, or 103.70 percent of stated value.•We redeemed our 7.2 percent Senior Notes due October 15, 2017 for $213 million, or 106.27 percent of stated value.•VLP issued $500 million of 4.375 percent Senior Notes due December 15, 2026. Proceeds from this debt issuance totaled$500 million before deducting the underwriting discount and other debt issuance costs. The proceeds were available only to theoperations of VLP and were used to repay $494 million on the VLP Revolver. On January 10, 2019, in connection with thecompletion of the Merger Transaction as described in Note 2, Valero entered into a guarantee agreement to fully andunconditionally guarantee the prompt payment, when due, of any amount owed to the holders of these notes.Other DebtDuring the year ended December 31, 2018, we retired $137 million of debt assumed in connection with the Peru Acquisition withavailable cash on hand.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. During the years ended December 31, 2018 and 2017, we recognized capital lease assets andrelated obligations totaling $63 million and $502 million, respectively. These capital lease agreements were primarily for the lease ofstorage tanks.91Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Other DisclosuresInterest and debt expense, net of capitalized interest is comprised as follows (in millions): Year Ended December 31, 2018 2017 2016Interest and debt expense$557 $539 $511Less capitalized interest87 71 65Interest and debt expense, net ofcapitalized interest$470 $468 $446Our credit facilities and other debt arrangements contain various customary restrictive covenants, including cross-default and cross-acceleration clauses.Principal maturities for our debt obligations and future minimum rentals on capital lease obligations as of December 31, 2018 were asfollows (in millions): Debt CapitalLeaseObligations2019$214 $692020855 65202115 6220225 64202320 65Thereafter7,474 957Net unamortized debt issuancecosts and other(80) n/aTotal minimum lease paymentsn/a 1,282Less amount representing interestn/a 676Total$8,503 $60610.COMMITMENTS AND CONTINGENCIESOperating LeasesWe have long-term operating lease commitments for land and office facilities; time charters for ocean-going tankers and coastal vessels(i.e., marine transportation assets); railcars; facilities and equipment related to industrial gases and power used in our operations;machinery and equipment used in our refining and ethanol operations; and various facilities and equipment used in the storage,transportation, production, and sale of refinery feedstock, refined petroleum product and corn inventories.In addition to minimum lease payments, some arrangements contain provisions for contingent lease payments. Certain leases for thestorage and transportation of feedstock and refined petroleum products provide for contingent lease payments based on throughputvolumes in excess of a base amount, while other leases for time charters of ocean-going tankers and coastal vessels contain paymentprovisions that are92Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)contingent on usage. Additionally, rental increases that are not scheduled in the lease are considered contingent lease payments. In mostcases, we expect that in the normal course of business, our leases will be renewed or replaced by other leases.As of December 31, 2018, our future minimum rentals for leases having initial or remaining noncancelable lease terms in excess ofone year were as follows (in millions):2019$3592020245202117820221462023123Thereafter514Total minimum rental payments$1,565Rental expense, net of sublease rental income was as follows (in millions): Year Ended December 31, 2018 2017 2016Minimum rental expense$515 $691 $739Contingent rental expense19 21 70Total rental expense534 712 809Less sublease rental income31 54 31Rental expense, net ofsublease rental income$503 $658 $778Purchase ObligationsWe have various purchase obligations under certain crude oil and other feedstock supply arrangements, industrial gas supplyarrangements (such as hydrogen supply arrangements), natural gas supply arrangements, and various throughput, transportation andterminaling agreements. We enter into these contracts to ensure an adequate supply of feedstock and utilities and adequate storagecapacity to operate our refineries and ethanol plants. Substantially all of our purchase obligations are based on market prices oradjustments based on market indices. Certain of these purchase obligations include fixed or minimum volume requirements, whileothers are based on our usage requirements. None of these obligations is associated with suppliers’ financing arrangements. Thesepurchase 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.In93Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)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. Construction of phases one and two of the project beganin 2017 with a total estimated cost of approximately $840 million, of which we have committed to contribute 50 percent (approximately$420 million). The project could expand up to four phases with a total project cost of approximately $1.4 billion if warranted byadditional demand and agreed to by Magellan and us. Since inception, we have contributed $247 million to MVP, of which$166 million was contributed during the year ended December 31, 2018.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 we determined that the terminaling agreement was a capital lease, we are theaccounting owner of the MVP Terminal during the construction period. Accordingly, as of December 31, 2018, we recorded an asset of$539 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 $292 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.On January 1, 2019, as a result of our adoption of Topic 842 as described in Note 1, we derecognized the asset and liability related toMVP discussed above and recorded our equity investment in MVP of $247 million, which will be included in deferred charges andother assets. We will recognize a finance lease asset and liability upon commencement of our terminaling arrangement with MVP asdescribed above.Central Texas PipelineWe have committed to a 40 percent undivided interest in a project with a subsidiary of Magellan to jointly build an estimated 130-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. The estimated cost of our 40 percent undivided interest in this pipeline is$170 million. Since inception, expenditures have totaled $80 million, of which $73 million was spent during the year endedDecember 31, 2018.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), that provides us a 20 percent undivided interest in the Sunrise Pipeline System expansion to be constructed byPlains. The Sunrise Pipeline System contains (i) a 262-mile, 24-inch crude oil pipeline (the Sunrise Pipeline) that originates at Plains’terminal in Midland, Texas and terminates at Plains’ station in Wichita Falls, Texas with throughput capacity of approximately500,000 barrels per day, and (ii) two 270,000 shell barrel capacity tanks located at the Colorado City, Texas station. The SunrisePipeline System expansion was placed in service in the fourth quarter of 2018. Expenditures totaled $139 million for the year endedDecember 31, 2018.94Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)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 environmental cleanup in the Village pursuant to a federal court order.We had previously conducted an initial response in the Village, along with other companies, pursuant to an administrative order issuedby the U.S. EPA. The parties involved in the initial response may have further claims among themselves for costs already incurred.We also continue to be engaged in site assessment and interim measures at the shutdown refinery site, which is adjacent to the Village.In 2018, we entered into a consent order with the Illinois EPA that was approved by the Illinois state court on July 26, 2018. In theconsent order, we assumed the underlying liability for full cleanup of the shutdown refinery site, and we recorded an adjustment to ourexisting environmental liability related to this matter, which did not materially affect our financial position or results of operations as ofor for the year ended December 31, 2018. We continue to seek contribution under Illinois law in state court and are pursuing claimsunder the Comprehensive Environmental Response, Compensation and Liability Act in federal court from other potentially responsibleparties. Factors underlying the expected cost of the cleanup are subject to change from time to time, and actual results may varysignificantly from the current estimate.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.95Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)11.EQUITYShare ActivityActivity in the number of shares of common stock and treasury stock was as follows (in millions): CommonStock TreasuryStockBalance 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 programs— (19)Balance as of December 31, 2017673 (240)Stock purchases under purchase programs— (16)Balance as of December 31, 2018673 (256)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, 2018 or 2017.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 July 13, 2015, our board of directors authorized us to purchase $2.5 billion of our outstanding common stock with no expirationdate, and we completed that program during 2017. On September 21, 2016, our board of directors authorized our purchase of up to anadditional $2.5 billion with no expiration date, and we completed that program during 2018. On January 23, 2018, our board ofdirectors authorized our purchase of up to an additional $2.5 billion (the 2018 Program) with no expiration date. During the yearsended December 31, 2018, 2017, and 2016, we purchased $1.5 billion, $1.3 billion, and $1.3 billion, respectively, of our commonstock under our programs. As of December 31, 2018, we have approval under the 2018 Program to purchase approximately$2.2 billion of our common stock.Common Stock DividendsOn January 24, 2019, our board of directors declared a quarterly cash dividend of $0.90 per common share payable on March 5, 2019to holders of record at the close of business on February 13, 2019.Valero Energy Partners LP UnitsOn September 16, 2016, VLP entered into an equity distribution agreement pursuant to which VLP offered and sold from time to timetheir common units having an aggregate offering price of up to $350 million based on amounts, at prices, and on terms determined bymarket conditions and other factors at the time of96Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)the offerings (such continuous offering program, or at-the-market program, referred to as the “ATM Program”). There were noissuances of common units under the ATM Program during the year ended December 31, 2018. VLP issued 742,897 and223,083 common units under the ATM Program and received net proceeds of $35 million and $9 million after deducting offering costsduring the years ended December 31, 2017 and 2016, respectively. Simultaneous with the Merger Transaction as described in Note 2,the ATM Program was terminated.Income Tax Effects Related to Components of Other Comprehensive Income (Loss)The tax effects allocated to each component of other comprehensive income (loss) were as follows (in millions): Before-TaxAmount Tax Expense(Benefit) Net AmountYear Ended December 31, 2018: Foreign currency translation adjustment$(517) $— $(517)Pension and other postretirement benefits: Gain arising during the year related to: Net actuarial gain1 — 1Prior service credit7 1 6Amounts reclassified into income related to: Net actuarial loss63 14 49Prior service credit(29) (7) (22)Curtailment and settlement loss7 2 5Net gain on pension and otherpostretirement benefits49 10 39Other comprehensive loss$(468) $10 $(478)97Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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) $470Year Ended December 31, 2016: Foreign currency translation adjustment$(415) $— $(415)Pension and other postretirement benefits: Loss arising during the year related to: Net actuarial loss(110) (34) (76)Miscellaneous gain— (8) 8Amounts reclassified into income related to: Net actuarial loss48 18 30Prior service credit(36) (13) (23)Net loss on pension and otherpostretirement benefits(98) (37) (61)Other comprehensive loss$(513) $(37) $(476)98Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Accumulated Other Comprehensive LossChanges in accumulated other comprehensive loss by component, net of tax, were as follows (in millions): ForeignCurrencyTranslationAdjustment DefinedBenefitPlanItems TotalBalance as of December 31, 2015$(605) $(328) $(933)Other comprehensive lossbefore reclassifications(416) (68) (484)Amounts reclassified fromaccumulated other comprehensive loss— 7 7Other comprehensive loss(416) (61) (477)Balance as of December 31, 2016(1,021) (389) (1,410)Other comprehensive income (loss)before reclassifications514 (56) 458Amounts reclassified fromaccumulated other comprehensiveloss— 12 12Other comprehensive income (loss)514 (44) 470Balance as of December 31, 2017(507) (433) (940)Other comprehensive income (loss)before reclassifications(515) 7 (508)Amounts reclassified fromaccumulated other comprehensive loss— 32 32Other comprehensive income (loss)(515) 39 (476)Reclassification of stranded incometax effects of Tax Reformto retained earnings perASU 2018-02 (see Note 1)— (91) (91)Balance as of December 31, 2018$(1,022) $(485) $(1,507)99Table 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, 2018 2017 2016 Amortization of items related todefined benefit pension plans: Net actuarial loss $(63) $(50) $(48) (a) Other income, netPrior service credit 29 36 36 (a) Other income, netCurtailment and settlement (7) (4) — (a) Other income, net (41) (18) (12) Total before tax 9 6 5 Tax benefitTotal reclassifications for the year $(32) $(12) $(7) Net of tax_________________________(a)These accumulated other comprehensive loss components are included in the computation of net periodic benefit cost (credit), as discussed inNote 13.12.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 (i) the power to direct theactivities of the VIE that most significantly impact the VIE’s economic performance and (ii) 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:•Prior to the completion of the Merger Transaction with VLP on January 10, 2019 as discussed in Note 2, VLP was a publiclytraded master limited partnership whose common limited partner units were traded on the New York Stock Exchange under thetrading symbol “VLP.” VLP was formed by us to own, operate, develop, and acquire crude oil and refined petroleum productspipelines, terminals, and other transportation and logistics assets. VLP’s assets include crude oil and refined petroleum productspipeline and terminal systems in the U.S. Gulf Coast and U.S. Mid-Continent regions that are integral to the operations of ten ofour refineries. As of December 31, 2018, we owned a 66.2 percent limited partner interest and a 2.0 percent general partnerinterest in VLP, and public unitholders owned a 31.8 percent limited partner interest.We determined VLP was a VIE because the public limited partners of VLP (i.e., parties other than entities under commoncontrol with the general partner) lacked the power to direct the activities of VLP that most significantly impacted its economicperformance because they did not have100Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)substantive kick-out rights over the general partner or substantive participating rights in VLP. Furthermore, we determined thatwe were the primary beneficiary of VLP because (i) we were the single decision maker and our general partner interest providesus with the sole power to direct the activities that most significantly impact VLP’s economic performance and (ii) our66.2 percent limited partner interest and 2.0 percent general partner interest provides us with significant economic rights andobligations. Substantially all of VLP’s revenues were derived from us; therefore, there was limited risk to us associated withVLP’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) with certain power to direct the activities that mostsignificantly impact DGD’s economic performance. Because this agreement conveys such power to us and is separate from ourownership rights, we determined that DGD was 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 Mexicancompany and subsidiary of Sempra Energy, a U.S. public company. The three subsidiaries are collectively referred to as CentralMexico Terminals and were previously referred to by us as VPM Terminals. The terminaling agreements represent variableinterests because we have determined them to be capital leases due to our exclusive use of the terminals. Although we do nothave an ownership interest in the entities that own each of the three terminals, the capital leases convey to us (i) the power todirect the activities that most significantly impact the economic performance of all three terminals and (ii) the ability to influencethe benefits received or the losses incurred by the terminals because of our use of the terminals. As a result, we determined eachof the entities was a VIE and that we are the primary beneficiary of each. Substantially all of Central Mexico Terminals’revenues will be derived from us; therefore, there is limited risk to us associated with Central Mexico Terminals’ operations.•We also have financial interests in other entities that have been determined to be VIEs because the entities’ contractualarrangements transfer the power to us to direct the activities that most significantly impact their economic performance orreduce the exposure to operational variability and risk of loss created by the entity that otherwise would be held exclusively bythe equity owners. Furthermore, we determined that we are the primary beneficiary of these VIEs because (i) 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 (ii) our101Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)50 percent ownership interests provide us with significant economic rights and obligations. The financial position, results ofoperations, 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, 2018 VLP DGD CentralMexicoTerminals Other TotalAssets Cash and cash equivalents$152 $65 $— $18 $235Other current assets2 112 20 64 198Property, plant, and equipment, net1,409 576 156 113 2,254Liabilities Current liabilities, including current portionof debt and capital lease obligations$27 $28 $118 $9 $182Debt and capital lease obligations,less current portion990 — — 34 1,024 December 31, 2017 VLP DGD CentralMexicoTerminals Other TotalAssets Cash and cash equivalents$42 $123 $1 $13 $179Other current assets2 66 4 — 72Property, plant, and equipment, net1,416 435 51 127 2,029Liabilities Current liabilities, including current portionof debt and capital lease obligations$27 $33 $26 $9 $95Debt and capital lease obligations,less current portion905 — — 43 948102Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Non-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.One of our non-consolidated VIEs is MVP, which is described in Note 10. We have a 50 percent membership interest in MVP, whichwas formed to construct, own, and operate the MVP Terminal. We determined MVP is a VIE because the power to direct the activitiesthat most significantly impact its economic performance is not required to be held by its two members, but is held by Magellan, asoperator under a construction, operating, and management agreement with MVP. For this reason and because Magellan holds a50 percent interest in MVP that provides it with significant economic rights and obligations, we determined that we are not the primarybeneficiary. As of December 31, 2018, our maximum exposure to loss was $247 million, which represents our equity investment inMVP. We have not provided any financial support to MVP other than amounts previously required by our membership interest.13.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 postretirement benefits under our plans as determined by the terms of the relevant acquisitionagreement.103Table 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, 2018 2017 2018 2017Changes in benefit obligation: Benefit obligation as of beginning of year$2,926 $2,567 $306 $302Service cost133 123 6 6Interest cost91 86 10 10Participant contributions— — 10 9Benefits paid(207) (158) (28) (28)Actuarial (gain) loss(285) 286 (9) 6Other(19) 22 (3) 1Benefit obligation as of end of year$2,639 $2,926 $292 $306 Changes in plan assets (a): Fair value of plan assets as of beginning of year$2,428 $2,097 $— $—Actual return on plan assets(130) 363 — —Valero contributions156 110 18 19Participant contributions— — 10 9Benefits paid(207) (158) (28) (28)Other(11) 16 — —Fair value of plan assets as of end of year$2,236 $2,428 $— $— Reconciliation of funded status (a): Fair value of plan assets as of end of year$2,236 $2,428 $— $—Less benefit obligation as of end of year2,639 2,926 292 306Funded status as of end of year$(403) $(498) $(292) $(306) Accumulated benefit obligation$2,492 $2,746 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 are not included here because they are not protected from our creditors and therefore cannot be reflected as a reduction fromour 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 ourdefined benefit plans. See Note 19 for the assets associated with certain U.S. nonqualified pension plans.104Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)The actuarial gain for the year ended December 31, 2018 primarily resulted from an increase in the discount rates used to determine ourbenefit obligations for our pension plans from 3.58 percent in 2017 to 4.25 percent in 2018. The actuarial loss for the year endedDecember 31, 2017 primarily resulted from a decrease in the discount rates used to determine the benefit obligations for our pensionplans from 4.08 percent in 2016 to 3.58 percent in 2017.The fair value of our plan assets as of December 31, 2018 was unfavorably impacted by the negative return on plan assets resultingprimarily from a significant decline in equity market prices for the year. The fair value of our plan assets as of December 31, 2017 wasfavorably impacted by the return on plan assets resulting primarily from a favorable increase in equity market prices for the year.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, 2018 2017 2018 2017Deferred charges and other assets, net$2 $5 $— $—Accrued expenses(22) (14) (21) (19)Other long-term liabilities(383) (489) (271) (287) $(403) $(498) $(292) $(306)The following table presents information for our pension plans with projected benefit obligations in excess of plan assets (in millions). December 31, 2018 2017Projected benefit obligation$2,564 $2,872Fair value of plan assets2,160 2,369The following table presents information for our pension plans with accumulated benefit obligations in excess of plan assets(in millions). December 31, 2018 2017Accumulated benefit obligation$2,253 $2,526Fair value of plan assets1,974 2,180105Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Benefit 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 OtherPostretirementBenefits2019$169 $212020193 212021175 212022180 202023194 202024-20281,043 95We plan to contribute approximately $35 million to our pension plans and $21 million to our other postretirement benefit plans during2019.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, 2018 20172016 2018 2017 2016Service cost$133 $123 $111 $6 $6 $7Interest cost91 86 84 10 10 12Expected return on plan assets(163) (150) (139) — — —Amortization of: Net actuarial (gain) loss65 53 49 (2) (3) (1)Prior service credit(18) (20) (20) (11) (16) (16)Special charges (credits)7 4 (7) — — —Net periodic benefit cost (credit)$115 $96 $78 $3 $(3) $2The components of net periodic benefit cost (credit) other than the service cost component (i.e., the non-service cost components) areincluded in other income, net in the statements of income.Amortization of prior service credit shown in the preceding table was based on a straight-line amortization of the cost over the averageremaining service period of employees expected to receive benefits under each respective plan. Amortization of the net actuarial (gain)loss shown in the preceding table was based on the straight-line amortization of the excess of the unrecognized (gain) loss over10 percent of the greater of the projected benefit obligation or market-related value of plan assets (smoothed asset value) over theaverage remaining service period of active employees expected to receive benefits under each respective plan.106Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Pre-tax amounts recognized in other comprehensive income (loss) were as follows (in millions): Pension Plans Other PostretirementBenefit Plans Year Ended December 31, Year Ended December 31, 2018 2017 2016 2018 2017 2016Net gain (loss) arising duringthe year: Net actuarial gain (loss)$(8) $(73) $(145) $9 $(6) $35Prior service (cost) credit7 (4) — — — —Net (gain) loss reclassified intoincome: Net actuarial (gain) loss65 53 49 (2) (3) (1)Prior service credit(18) (20) (20) (11) (16) (16)Curtailment and settlement loss7 4 — — — —Total changes in othercomprehensive income (loss)$53 $(40) $(116) $(4) $(25) $18The 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, 20182017 2018 2017Net actuarial (gain) loss$828 $894 $(64) $(57)Prior service credit(108) (121) (31) (42)Total$720 $773 $(95) $(99)The weighted-average assumptions used to determine the benefit obligations were as follows: Pension Plans Other PostretirementBenefit Plans December 31, December 31, 2018 2017 2018 2017Discount rate4.25% 3.58% 4.40% 3.72%Rate of compensation increase3.78% 3.86% n/a n/aInterest crediting rate forcash balance plans3.04% 3.04% n/an/aThe discount rate assumption used to determine the benefit obligations as of December 31, 2018 and 2017 for the majority of ourpension plans and other postretirement benefit plans was based on the Aon AA Only Above Median yield curve and considered thetiming of the projected cash outflows under our plans. This curve was designed by Aon to provide a means for plan sponsors to valuethe liabilities of their pension plans107Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)or postretirement benefit plans. It is a hypothetical double-A yield curve represented by a series of annualized individual discount rateswith maturities from one-half year to 99 years. Each bond issue underlying the curve is required to have an average rating of double-Awhen averaging all available ratings by Moody’s Investors Service, Standard & Poor’s Ratings Services, and Fitch Ratings. Only thebonds representing the 50 percent highest yielding issuances among those with average ratings of double-A are included in this yieldcurve.We based our discount rate assumption on the Aon AA Only Above Median yield curve because we believe it is representative of thetypes of bonds we would use to settle our pension and other postretirement benefit plan liabilities as of those dates. We believe that theyields 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, 2018 2017 2016 2018 2017 2016Discount rate3.59% 4.08% 4.45% 3.72% 4.26% 4.53%Expected long-term rate of returnon plan assets7.24% 7.29% 7.28% n/a n/a n/aRate of compensation increase3.86% 3.81% 3.79% n/a n/a n/aInterest crediting rate forcash balance plans3.04% 3.04% 3.10% n/a n/a n/aThe assumed health care cost trend rates were as follows: December 31, 2018 2017Health care cost trend rate assumed for the next year7.29% 7.30%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 2026108Table 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, 2018 and 2017 by levelof the fair value hierarchy. Assets categorized in Level 1 of the hierarchy are measured at fair value using a market approach based onunadjusted quoted prices from national securities exchanges. Assets categorized in Level 2 of the hierarchy are measured at net assetvalue in a market that is not active. As previously noted, we do not fund or fully fund U.S. nonqualified and certain internationalpension plans that are not subject to funding requirements, and we do not fund our other postretirement benefit plans. Fair Value Hierarchy Total as ofDecember 31,2018 Level 1 Level 2 Level 3 Equity securities: U.S. companies (a)$497 $— $— $497International companies159 1 — 160Preferred stock4 — — 4Mutual funds: International growth97 — — 97Index funds (b)76 — — 76Corporate debt instruments— 284 — 284Government securities: U.S. Treasury securities45 — — 45Other government securities— 138 — 138Common collective trusts (c)— 609 — 609Pooled separate accounts (d)— 190 — 190Private funds— 87 — 87Insurance contract— 18 — 18Interest and dividends receivable5 — — 5Cash and cash equivalents40 — — 40Securities transactions payable, net(14) — — (14)Total pension plan assets$909 $1,327 $— $2,236___________________________ See notes on page 110.109Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Fair Value Hierarchy 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 (d)— 192 — 192Private funds— 101 — 101Insurance contract— 18 — 18Interest and dividends receivable5 — — 5Cash and cash equivalents85 1 — 86Securities transactions payable, net(22) — — (22)Total pension plan assets$1,078 $1,350 $— $2,428__________________________________ (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 60 percent equities and 40 percent bonds as of December 31, 2018. As of December 31,2017, this class included primarily investments in approximately 70 percent equities and 30 percent bonds.(c)This class includes primarily investments in approximately 70 percent equities and 30 percent bonds as of December 31, 2018. As of December 31,2017, this class included primarily investments in approximately 80 percent equities and 20 percent bonds.(d)This class includes primarily investments in approximately 50 percent equities and 50 percent bonds as of December 31, 2018 and 2017.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 by110Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)the U.S. government and its agencies, corporate bonds, and mortgage-backed securities. The aggregate asset allocation is reviewed onan annual basis. As of December 31, 2018, the target allocations for plan assets under our primary pension plan are 70 percent equitysecurities and 30 percent fixed income investments.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’s best expectations for these asset classes. The model reflects the positive effect of periodicrebalancing 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$74 million, $70 million, and $67 million for the years ended December 31, 2018, 2017, and 2016, respectively.14.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, but are not limited to, (i) restricted stock that vests over a perioddetermined by our compensation committee, (ii) performance awards that vest upon the achievement of an objective performance goal,(iii) options to purchase shares of common stock, (iv) dividend equivalent rights, and (v) stock appreciation rights. The OSIP wasapproved by our stockholders on April 28, 2011 and re-approved by our stockholders on May 12, 2016. As of December 31, 2018,8,532,542 shares of our common stock remained available to be awarded under the OSIP.We also maintain other stock-based compensation plans under which previously granted equity awards remain outstanding. Noadditional grants may be awarded under these plans.111Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)The following table reflects activity related to our stock-based compensation arrangements (in millions): Year Ended December 31, 2018 2017 2016Stock-based compensation expense: Restricted stock$63 $58 $52Performance awards22 19 15Stock options and other awards1 — 1Total stock-based compensation expense$86 $77 $68Tax benefit recognized on stock-based compensation expense$18 $27 $24Tax benefit realized for tax deductions resulting fromexercises and vestings32 44 33Effect of tax deductions in excess of recognizedstock-based compensation expense20 24 22The following is a discussion of our significant stock-based compensation arrangement.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, 20181,401,040 $69.82Granted628,908 92.12Vested(843,709) 71.26Forfeited(9,661) 69.97Nonvested shares as of December 31, 20181,176,578 80.70As of December 31, 2018, there was $56 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.112Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)The following table reflects activity related to our restricted stock: Year Ended December 31, 2018 2017 2016Weighted-average grant-date fair value per share ofrestricted stock granted$92.12 $79.32 $59.00Fair value of restricted stock vested (in millions)80 71 4615.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 GILTI tax) rather than a tax deferral on such earnings in certain circumstances; and•assessment of a one-time transition tax on deemed repatriated earnings and profits from our international subsidiaries.The following narrative describes the activity that occurred with respect to Tax Reform for the years ended December 31, 2017 and2018.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 had 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, with the first annual remittance being paid 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.113Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)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,” that was codified through the issuance of ASU No. 2018-05 as described in Note 1.Specifically, ASU No. 2018-05 required that the effects of Tax Reform be recorded for items where the accounting was complete, aswell as for items where a reasonable estimate could be made (referred to as provisional amounts). For items where reasonable estimatescould not be made, provisional amounts were not recorded and those items continued to be accounted for under the Code prior tochanges from Tax Reform until a reasonable estimate could be made. During the fourth quarter of 2018, we completed our accountingfor the income tax effects of Tax Reform, and we reflected an overall income tax benefit of $12 million for the year endedDecember 31, 2018 with respect to Tax Reform.The following table summarizes the components of our adjustment (in millions) to reflect the effects of Tax Reform for the years endedDecember 31, 2018 and 2017, including whether such amounts were complete, provisional, or incomplete. The amounts presented for2018 were completed during the fourth quarter of 2018. Year Ended December 31, CumulativeTax ReformAdjustment 2017 2018 AccountingStatus Amount AccountingStatus Amount Income tax benefit from the remeasurement ofU.S. deferred income tax assets and liabilitiesComplete $(2,643) Complete $— $(2,643)Tax on the deemed repatriation of theaccumulated earnings and profits of ourinternational subsidiariesProvisional 734 Complete 6 740Recognition of foreign withholding tax, net ofU.S. federal tax benefitComplete 47 Complete — 47Deductibility of certain executive compensationexpenseIncomplete — Complete 5 5Income tax expense associated with the statutoryincome tax rate differential on accrual toreturn adjustments that were identified uponcompletion of our U.S. federal incometax return in 2018Incomplete — Complete 9 9Foreign tax credit available to offset the tax ondeemed repatriation of the accumulatedearnings and profits of our internationalsubsidiariesIncomplete — Complete (32) (32)Tax Reform benefit $(1,862) $(12) $(1,874)114Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Income Statement ComponentsIncome before income tax expense (benefit) was as follows (in millions): Year Ended December 31, 2018 2017 2016U.S. operations$3,168 $2,283 $1,733International operations1,064 924 1,449Income before income tax expense (benefit)$4,232 $3,207 $3,182Statutory income tax rates applicable to the countries in which we operate were as follows: Year Ended December 31, 2018 2017 2016U.S.21% 35% 35%Canada15% 15% 15%U.K.19% 19% 20%Ireland13% 13% 13%Peru30% n/a n/aMexico30% n/a n/aAruban/a n/a 7%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, 2018 U.S. International Total Amount Percent Amount Percent Amount PercentIncome tax expense at statutory rates$665 21.0 % $163 15.3% $828 19.6 %U.S. state and Canadian provincialtax expense, net of federalincome tax effect44 1.4 % 80 7.5% 124 2.9 %Permanent differences(9) (0.3)% — — (9) (0.2)%GILTI tax67 2.1 % — — 67 1.6 %Foreign tax credits(50) (1.6)% — — (50) (1.2)%Effects of Tax Reform(12) (0.4)% — — (12) (0.3)%Tax effects of income associatedwith noncontrolling interests(49) (1.5)% — — (49) (1.2)%Other, net(23) (0.7)% 3 0.3% (20) (0.5)%Income tax expense$633 20.0 % $246 23.1% $879 20.7 %115Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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 %116Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Components of income tax expense (benefit) related to our operations were as follows (in millions): Year Ended December 31, 2018 U.S. International TotalCurrent: Country$432 $141 $573U.S. state / Canadian provincial37 66 103Total current469(a)207 676Deferred: Country145 25 170U.S. state / Canadian provincial19 14 33Total deferred164(b)39 203Income tax expense$633 $246 $879 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)___________________________ (a)Current income tax expense includes a $21 million benefit and a $781 million expense related to our Tax Reform adjustment for the years endedDecember 31, 2018 and 2017, respectively, as described in “Tax Reform” above.(b)Deferred income tax expense (benefit) includes a $9 million expense and a $2.6 billion benefit related to our Tax Reform adjustment for the yearsended December 31, 2018 and 2017, respectively, as described in “Tax Reform” above.117Table 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 $765Income Taxes PaidIncome taxes paid to U.S. and international taxing authorities were as follows (in millions): Year Ended December 31, 2018 2017 2016U.S.$1,016 $239 $241International345 171 203Income taxes paid, net$1,361 $410 $444118Table 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, 2018 2017Deferred income tax assets: Tax credit carryforwards$644 $69Net operating losses (NOLs)523 492Inventories101 135Compensation and employee benefit liabilities175 179Environmental liabilities71 47Other141 112Total deferred income tax assets1,655 1,034Valuation allowance(1,111) (498)Net deferred income tax assets544 536 Deferred income tax liabilities: Property, plant, and equipment4,589 4,545Deferred turnaround costs316 272Inventories287 243Investments142 77Other172 107Total deferred income tax liabilities5,506 5,244Net deferred income tax liabilities$4,962 $4,708We had the following income tax credit and loss carryforwards as of December 31, 2018 (in millions): Amount ExpirationU.S. state income tax credits$80 2019 through 2031U.S. state income tax credits6 UnlimitedU.S. foreign tax credits575 2027U.S. state NOLs (gross amount)10,039 2019 through 2038We have recorded a valuation allowance as of December 31, 2018 and 2017 due to uncertainties related to our ability to utilize some ofour deferred income tax assets, primarily consisting of U.S. foreign tax credits and certain U.S. state income tax credits and NOLs,before they expire. The valuation allowance is based on our estimates of taxable income in the various jurisdictions in which we operateand the period over which deferred income tax assets will be recoverable. As a part of the completion of the accounting for the incometax effects of Tax Reform as described in “Tax Reform” above, we assessed the ability of our available foreign tax credits to offset thetax on the deemed repatriation of the accumulated earnings and profits of119Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)our international subsidiaries. The completion of such accounting resulted in U.S. general limitation foreign tax credit carryforwardsand a correlating valuation allowance provided on the balance of the deferred income tax asset related to those carryforwards as it is notmore likely than not that the deferred income tax asset will be realized. The valuation allowance increased by $613 million, primarilydue to approximately $575 million of excess U.S. foreign tax credits. Foreign tax credits as of December 31, 2017 were used to offsetthe one-time transition tax, and excess tax credits were generated on the transition tax inclusion. Tax Reform imposes certain limits on acompany’s use of foreign tax credits in the future, including any excess credits generated from the mandatory income inclusion ofpreviously deferred foreign earnings. The realization of net deferred income tax assets related to state income tax credits and NOLsrecorded as of December 31, 2018 is primarily dependent upon our ability to generate future taxable income in certain U.S. states.As described in “Tax Reform” above, one of the most significant changes in Tax Reform was 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 bases 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. In the fourth quarter of2018, the one-time transition tax was increased by $6 million. Also, in the fourth quarter, we recorded a foreign tax credit of$32 million related to the one-time transition tax. Because of the deemed repatriation of these accumulated earnings and profits, thereare no longer any U.S. federal income tax consequences associated with the repatriation of any of the $2.4 billion of cash and cashequivalents held by our international subsidiaries as of December 31, 2018. However, certain countries in which our internationalsubsidiaries are organized impose withholding taxes on cash distributed outside of those countries. As of December 31, 2018, thecumulative undistributed earnings of these subsidiaries were approximately $5.3 billion. We have accrued for withholding taxes on aportion of the cash held by one of our international subsidiaries that we have deemed to not be permanently reinvested in ouroperations in that country. The remaining cash held by that subsidiary as well as our other international subsidiaries will be permanentlyreinvested in our operations in those countries. It is not practicable to estimate the amount of additional tax that would be payable onthose earnings, if distributed.120Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)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, 2018 2017 2016Balance as of beginning of year$941 $936 $964Additions based on tax positions related to the current year23 33 36Additions for tax positions related to prior years28 15 11Reductions for tax positions related to prior years(19) (42) (46)Reductions for tax positions related to the lapse ofapplicable statute of limitations(1) (1) (3)Settlements(2) — (237)Reclassification of uncertain tax receivable to long-termreceivable from IRS— — 211Balance as of end of year$970 $941 $936As of December 31, 2018, the balance in unrecognized tax benefits included $277 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, 2018, 2017, and 2016 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, 2018 2017Unrecognized tax benefits$970 $941Tax refund claim not presented in our balance sheets(277) (274)Other88 77Uncertain tax position liabilities presented in our balance sheets$781 $744121Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Amounts recognized in our balance sheets for uncertain tax positions include (in millions): December 31, 2018 2017Income taxes payable$42 $—Other long-term liabilities721 723Deferred tax liabilities18 21Uncertain tax position liabilities presented in our balance sheets$781 $744As of December 31, 2018 and 2017, there were $807 million and $793 million, respectively, of unrecognized tax benefits that ifrecognized would affect our annual effective tax rate.Penalties and interest during the years ended December 31, 2018, 2017, and 2016 were immaterial. Accrued penalties and interesttotaled $88 million and $77 million as of December 31, 2018 and 2017, 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.Tax Returns Under AuditU.S. FederalAs of December 31, 2018, our U.S. federal tax returns for 2010 through 2015 were under audit by the IRS. The IRS has proposedadjustments to our taxable income for certain open years. We are currently contesting the proposed adjustments with the Office ofAppeals of the IRS for certain open years and do not expect that the ultimate disposition of these adjustments will result in a materialchange to our financial position, results of operations, or liquidity. We are continuing to work with the IRS to resolve these matters andwe believe that they will be resolved for amounts consistent with recorded amounts of unrecognized tax benefits associated with thesematters.We have amended our U.S federal income tax returns for 2005 through 2009 to exclude from taxable income incentive paymentsreceived from the U.S. federal government for blending alcohol fuel mixtures. These amended return claims have been disallowed bythe IRS and we are currently protesting the disallowance of these adjustments. An ultimate disallowance of the exclusion from incomewould not result in a material change to our financial position, results of operations, or liquidity.U.S. StateAs of December 31, 2018, our California tax returns for 2004 through 2008 and 2011 through 2014 were under audit by the state ofCalifornia. We do not expect the ultimate disposition of these audits will result in a material change to our financial position, results ofoperations, or liquidity. We believe these audits will be resolved for amounts consistent with our recorded amounts of unrecognized taxbenefits associated with these audits.122Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)InternationalAs of December 31, 2018, our Canadian subsidiary’s federal tax returns for 2013 and 2014 were under audit by Canada RevenueAgency (CRA) and our Quebec provincial tax returns for 2013 through 2016 were under audit by Revenue Quebec. We are protestingthe proposed adjustments by CRA for 2013 and we do not expect the ultimate disposition of these adjustments will result in a materialchange to our financial position, results of operations, or liquidity.16.EARNINGS PER COMMON SHAREEarnings per common share were computed as follows (dollars and shares in millions, except per share amounts): Year Ended December 31, 2018 2017 2016Earnings per common share: Net income attributable to Valero stockholders$3,122$4,065$2,289Less income allocated to participating securities9 14 7Net income available to common shareholders$3,113 $4,051 $2,282 Weighted-average common shares outstanding426 442 461 Earnings per common share$7.30 $9.17 $4.94 Earnings per common share – assuming dilution: Net income attributable to Valero stockholders$3,122 $4,065 $2,289 Weighted-average common shares outstanding426 442 461Effect of dilutive securities2 2 3Weighted-average common shares outstanding –assuming dilution428 444 464 Earnings per common share – assuming dilution$7.29 $9.16 $4.94Participating securities include restricted stock and performance awards granted under our 2011 Omnibus Stock Incentive Plan. Dilutivesecurities include participating securities as well as outstanding stock options granted under our 2011 Omnibus Stock Incentive Plan.123Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)17.REVENUES AND SEGMENT INFORMATIONRevenue from Contracts with CustomersDisaggregation of RevenueRevenue is presented in the table below under “Segment Information” disaggregated by product because this is the level ofdisaggregation that management has determined to be beneficial to users of our financial statements.Receivables from Contracts with CustomersOur receivables from contracts with customers are included in receivables, net as presented in Note 4.Remaining Performance ObligationsThe majority of our contracts with customers are spot contracts and therefore have no remaining performance obligations. Ourremaining contracts with customers are primarily term contracts. The transaction price for these term contracts includes an immaterialfixed amount and variable consideration (i.e., a commodity price). The variable consideration is allocated entirely to a whollyunsatisfied promise to transfer a distinct good that forms part of a single performance obligation; therefore, the variable consideration isnot included in the remaining performance obligation. As of December 31, 2018, after excluding contracts with an original expectedduration of one year or less, the aggregate amount of the transaction price allocated to our remaining performance obligations was notmaterial as the transaction price for these contracts includes only an immaterial fixed amount.Segment InformationAs of December 31, 2018, we had three reportable segments – refining, ethanol, and VLP. Each segment is a strategic business unit thatoffers different products and services by employing unique technologies and marketing strategies and whose operations and operatingperformance are managed and evaluated separately. Operating performance is measured based on the operating income generated bythe segment, which includes revenues and expenses that are directly attributable to the management of the respective segment.Intersegment sales are generally derived from transactions made at prevailing market rates. The following is a description of eachsegment’s business operations.•The refining segment includes the operations of our 15 petroleum refineries, the associated marketing activities, and certainlogistics assets that support our refining operations that are not owned by VLP. The principal products manufactured by ourrefineries and sold by this segment include gasolines and blendstocks (e.g., conventional gasolines, premium gasolines, andgasoline meeting the specifications of the California Air Resources Board (CARB)), distillates (e.g., diesel, low-sulfur diesel,ultra-low-sulfur diesel, CARB diesel, jet fuel, and other distillates), and other products (e.g., asphalt, petrochemicals, lubricants,and other refined petroleum products).•The ethanol segment includes the operations of our 14 ethanol plants, the associated marketing activities, and logistics assetsthat support our ethanol operations. The principal products manufactured by our ethanol plants are ethanol and distillers grains.We sell some ethanol to our refining segment for blending into gasoline, which is sold to that segment’s customers as a finishedgasoline product.124Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)•The VLP segment includes the results of VLP. VLP generates revenue from transportation and terminaling activities provided toour refining segment. All of VLP’s revenues are intersegment revenues that are generated under commercial agreements withour refining segment. Revenues generated under these agreements are eliminated in consolidation.Operations that are not included in any of the reportable segments are included in the corporate category.The following tables reflect information about our operating income and total expenditures for long-lived assets by reportable segment(in millions): Refining Ethanol VLP CorporateandEliminations TotalYear ended December 31, 2018: Revenues: Revenues from external customers$113,601 $3,428 $— $4 $117,033Intersegment revenues14 210 546 (770) —Total revenues113,615 3,638 546 (766) 117,033Cost of sales: Cost of materials and other102,489 3,008 — (765) 104,732Operating expenses (excluding depreciationand amortization expense reflected below)4,099 470 125 (4) 4,690Depreciation and amortization expense1,863 78 76 — 2,017Total cost of sales108,451 3,556 201 (769) 111,439Other operating expenses45 — — — 45General and administrative expenses (excludingdepreciation and amortization expense reflectedbelow)— — — 925 925Depreciation and amortization expense— — — 52 52Operating income by segment$5,119 $82 $345 $(974) $4,572Total expenditures for long-lived assets (a)$2,935 $373 $24 $44 $3,376__________________________ See note on page 126.125Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Refining Ethanol VLP CorporateandEliminations TotalYear ended December 31, 2017: Revenues: Revenues from external customers$90,651 $3,324 $— $5 $93,980Intersegment revenues6 176 452 (634) —Total 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)3,959 443 104 (2) 4,504Depreciation and amortization expense1,800 81 53 — 1,934Total cost of sales86,624 3,328 157 (634) 89,475Other operating expenses58 — 3 — 61General and administrative expenses (excludingdepreciation and amortization expense reflectedbelow)— — — 829 829Depreciation and amortization expense— — — 52 52Operating income by segment$3,975 $172 $292 $(876) $3,563Total expenditures for long-lived assets (a)$1,710 $84 $110 $44 $1,948Year Ended December 31, 2016: Revenues: Revenues from external customers$71,968 $3,691 $— $— $75,659Intersegment revenues— 210 363 (573) —Total 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)3,740 415 96 — 4,251Depreciation and amortization expense1,734 66 46 — 1,846Lower of cost or market inventoryvaluation adjustment(697) (50) — — (747)Total cost of sales68,182 3,561 142 (573) 71,312General and administrative expenses (excludingdepreciation and amortization expense reflectedbelow)— — — 709 709Depreciation and amortization expense— — — 48 48Asset impairment loss56 — — — 56Operating income by segment$3,730 $340 $221 $(757) $3,534Total expenditures for long-lived assets (a)$1,867 $68 $23 $38 $1,996__________________________ (a)Total expenditures for long-lived assets includes amounts related to capital expenditures, deferred turnaround and catalyst costs, and property, plant, andequipment for acquisitions.126Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)The following table provides a disaggregation of revenues by reportable segment (in millions). Refining and ethanol segment revenuesare disaggregated for our principal products, and VLP segment revenues are disaggregated by activity type. Year Ended December 31, 2018 2017 2016Refining: Gasolines and blendstocks$46,606 $40,366 $33,450Distillates55,546 42,074 32,576Other product revenues11,463 8,217 5,942Total refining revenues113,615 90,657 71,968Ethanol: Ethanol2,912 2,940 3,315Distillers grains726 560 586Total ethanol revenues3,638 3,500 3,901VLP: Pipeline transportation124 101 78Terminaling415 348 284Storage and other7 3 1Total VLP revenues546 452 363Corporate – other revenues4 5 —Elimination of intersegment revenues(770) (634) (573)Revenues$117,033 $93,980 $75,659Revenues by geographic area are shown in the following table (in millions). The geographic area is based on location of customer andno customer accounted for 10 percent or more of our revenues. Year Ended December 31, 2018 2017 2016U.S.$82,992 $66,614 $51,479Canada9,211 7,039 6,115U.K. and Ireland15,208 11,556 10,797Other countries9,622 8,771 7,268Revenues$117,033 $93,980 $75,659127Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Long-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, 2018 2017U.S.$27,475 $26,083Canada1,798 1,915U.K. and Ireland1,113 1,063Other countries266 —Total long-lived assets$30,652 $29,061Total assets by reportable segment were as follows (in millions): December 31, 2018 2017Refining$42,673 $40,382Ethanol1,691 1,344VLP1,620 1,517Corporate and eliminations4,171 6,915Total assets$50,155 $50,158As of December 31, 2018 and 2017, our investments in joint ventures accounted for under the equity method were $542 million and$530 million, respectively, all of which related to the refining segment and are reflected in “deferred charges and other assets, net” aspresented in Note 7.Effective January 1, 2019, we revised our reportable segments to align with certain changes in how our chief operating decision makermanages and allocates resources to our business. Accordingly, we created a new reportable segment — renewable diesel — because ofthe growing importance of renewable fuels in the market and the growth of our investments in renewable fuels production. Therenewable diesel segment includes the operations of DGD, our consolidated joint venture as discussed in Note 12. The operations ofDGD have been included in the refining segment through December 31, 2018, but were transferred from that segment on January 1,2019. Also effective January 1, 2019, we no longer have a VLP segment, and we include the operations of VLP in our refiningsegment. This change was made because of the Merger Transaction with VLP, as described in Note 2, and the resulting change in howwe manage VLP’s operations. We no longer manage VLP as a business but as logistics assets that support the operations of our refiningsegment.128Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)18.SUPPLEMENTAL CASH FLOW INFORMATIONIn order to determine net cash provided by operating activities, net income is adjusted by, among other things, changes in current assetsand current liabilities as follows (in millions): Year Ended December 31, 2018 2017 2016Decrease (increase) in current assets: Receivables, net$(457) $(870) $(1,531)Inventories(197) (516) 771Prepaid expenses and other(77) 151 47Increase (decrease) in current liabilities: Accounts payable304 1,842 1,556Accrued expenses(113) 21 117Taxes other than income taxes payable(73) 172 82Income taxes payable(684) 489 (66)Changes in current assets and current liabilities$(1,297) $1,289 $976Cash flows related to interest and income taxes were as follows (in millions): Year Ended December 31, 2018 2017 2016Interest paid in excess of amount capitalized$463 $457 $427Income taxes paid, net1,361 410 444Cash 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, 2018 included the recognition of (i) capital lease assets andrelated obligations totaling $63 million primarily for the lease of storage tanks as described in Note 9 and (ii) terminal assets and relatedobligation totaling $198 million under owner accounting as described in Note 10.Noncash investing and financing activities for the year ended December 31, 2017 included the recognition of (i) capital lease assets andrelated obligations totaling $502 million primarily for the lease of storage tanks as described in Note 9 and (ii) terminal assets andrelated obligation totaling $94 million under owner accounting as described in Note 10.There were no significant noncash investing and financing activities for the year ended December 31, 2016.129Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)19.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.130Table 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, 2018 and2017.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, 2018 TotalGross FairValue Effect ofCounter-partyNetting Effect ofCashCollateralNetting NetCarryingValue onBalanceSheet CashCollateralPaid orReceivedNot Offset Fair Value Hierarchy Level 1 Level 2 Level 3 Assets: Commodity derivativecontracts$2,792 $— $— $2,792 $(2,669) $(34) $89 $—Foreign currencycontracts4 — — 4 n/a n/a 4 n/aInvestments of certainbenefit plans60 — 9 69 n/a n/a 69 n/aTotal$2,856 $— $9 $2,865 $(2,669) $(34) $162 Liabilities: Commodity derivativecontracts$2,681 $— $— $2,681 $(2,669) $(12) $— $(136)Environmental creditobligations— 13 — 13 n/a n/a 13 n/aPhysical purchasecontracts— 5 — 5 n/a n/a 5 n/aForeign currencycontracts1 — — 1 n/a n/a 1 n/aTotal$2,682 $18 $— $2,700 $(2,669) $(12) $19 131Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2017 TotalGrossFairValue 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 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, which are used to reduce the impact of pricevolatility on our results of operations and cash flows as discussed in Note 20. These contracts are measured at fair value usingthe market approach. Exchange-traded futures are valued based on quoted prices from the commodity exchange and arecategorized in Level 1 of the fair value 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 plan 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 plan assetscategorized in Level 3 of the fair value hierarchy represent insurance contracts, the fair value of which is provided by theinsurer.132Table 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) and similar programs, (collectively, the cap-and-trade systems). To the degree we are unable to blend biofuels (such as ethanol and biodiesel) at percentages required underthe biofuel programs, we must purchase biofuel credits to comply with these programs. Under the cap-and-trade systems, wemust purchase emission credits to comply with these systems. These programs are described in Note 20 under “EnvironmentalCompliance Program Price Risk.” The liability for environmental credits is based on our deficit for such credits as of the balancesheet date, if any, after considering any credits acquired or under contract, and is equal to the product of the credits deficit andthe market price of these credits as of the balance sheet date. The environmental credit obligations are categorized in Level 2 ofthe fair value hierarchy and are measured at fair value using the market approach based on quoted prices from an independentpricing service.There were no transfers into or out of Level 3 for assets and liabilities held as of December 31, 2018 and 2017 that were measured atfair value on a recurring basis.There was no significant activity during the years ended December 31, 2018, 2017, and 2016 related to the fair value amountscategorized in Level 3 as of December 31, 2018 and 2017.Nonrecurring Fair Value MeasurementsAs discussed in Note 3, 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, 2018 and 2017.133Table 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, 2018 December 31, 2017 Fair ValueHierarchy CarryingAmount FairValue CarryingAmount FairValueFinancial assets: Cash and cash equivalentsLevel 1 $2,982 $2,982 $5,850 $5,850Financial liabilities: Debt (excluding capital leases)Level 2 8,503 8,986 8,310 9,79520.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 19), 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, such as futures and options. Our positions incommodity derivative instruments are monitored and managed on a daily basis by our risk control group to ensure compliance with ourstated risk management policy that has been approved by our board of directors.We primarily use commodity derivative instruments as economic hedges, which are not designated as hedging instruments, and we usefair value and cash flow hedges from time to time. We had no commodity derivative instruments outstanding as of December 31, 2018and 2017, and no activity during the years ended December 31, 2018, 2017, and 2016 that were designated as fair value or cash flowhedges.Our objectives for holding economic hedges are to (i) manage price volatility in certain feedstock and refined petroleum productinventories and fixed-price purchase contracts, and (ii) lock in the price of forecasted feedstock, refined petroleum product, or naturalgas purchases and refined petroleum product sales at existing market prices that we deem favorable.As of December 31, 2018, we had the following outstanding commodity derivative instruments that were used as economic hedges, aswell as commodity derivative instruments related to the physical purchase of134Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)corn at a fixed price. The information presents the notional volume of outstanding contracts by type of instrument and year of maturity(volumes in thousands of barrels, except those identified as natural gas contracts that are presented in millions of British thermal units,corn contracts that are presented in thousands of bushels, and soybean oil contracts that are presented in thousands of pounds). Notional Contract Volumes byYear of MaturityDerivative Instrument 2019 2020Crude oil and refined petroleum products: Futures – long 149,470 224Futures – short 143,826 671Options – long 26,500 —Options – short 26,500 —Natural gas: Futures – long 5,000,000 —Corn: Futures – long 26,025 —Futures – short 55,395 875Physical contracts – long 27,109 875Soybean oil: Futures – long 137,518 —Futures – short 285,957 —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, 2018, we had forward contracts to purchase$441 million of U.S. dollars. All of these commitments matured on or before January 31, 2019.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 inthe market price of these credits, and we manage that risk by purchasing biofuel credits when prices are deemed135Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)favorable. For the years ended December 31, 2018, 2017, and 2016, the cost of meeting our obligations under these complianceprograms was $536 million, $942 million, and $749 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 19.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, 2018, 2017, and2016 and expect to continue to recover the majority of these costs in the future. For the years ended December 31, 2018, 2017, and2016, 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, 2018 and 2017(in millions) and the line items in the balance sheets in which the fair values are reflected. See Note 19 for additional information relatedto the fair values of our derivative instruments.As indicated in Note 19, 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, 2018 December 31, 2017 AssetDerivatives LiabilityDerivatives AssetDerivatives LiabilityDerivativesDerivatives not designatedas hedging instruments Commodity contracts: FuturesReceivables, net $2,787 $2,681 $886 $966OptionsReceivables, net 5 — 8 3Physical purchase contractsInventories — 5 — 6Foreign currency contractsReceivables, net 4 — — —Foreign currency contractsAccrued expenses — 1 — 7Total $2,796 $2,687 $894 $982Market 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.136Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Effect of Derivative Instruments on IncomeThe following tables provide information about the gain or loss recognized in income on our derivative instruments and the line itemsin the statements of income in which such gains and losses are reflected (in millions).Derivatives Used asEconomic Hedges Location of Gain (Loss)Recognized in Incomeon Derivatives Year Ended December 31, 2018 2017 2016Commodity contracts Cost of materials and other $(165) $(278) $(86)Commodity contracts Operating expenses(excluding depreciation andamortization expense) 7 — —Foreign currency contracts Cost of materials and other 56 (40) 16137Table of ContentsVALERO ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)21.QUARTERLY FINANCIAL DATA (Unaudited)The following tables summarize quarterly financial data for the years ended December 31, 2018 and 2017 (in millions, except per shareamounts). 2018 Quarter Ended March 31 June 30 September 30 December 31Revenues$26,439 $31,015 $30,849 $28,730Gross profit (a)1,062 1,535 1,451 1,546Operating income801 1,253 1,219 1,299Net income582 875 874 1,022Net income attributable toValero Energy Corporationstockholders469 845 856 952Earnings per common share1.09 1.96 2.01 2.26Earnings per common share –assuming dilution1.09 1.96 2.01 2.24 2017 Quarter Ended March 31 June 30 September 30 December 31 (b)Revenues$21,772 $22,254 $23,562 $26,392Gross profit (a)732 1,049 1,614 1,110Operating income528 860 1,332 843Net 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___________________________ (a)Gross profit is calculated as 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 15.138Table 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, 2018.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 62 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 64 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.On January 1, 2019, we adopted Topic 842, which we discuss in Note 1 of Notes to Consolidated Financial Statements. As a result, wehave made changes affecting our internal control over financial reporting in conjunction with the adoption of this standard. Weenhanced our contracting and lease evaluation systems and related processes, and we developed a new lease accounting system tocapture our leases and support the required disclosures. We have integrated our lease accounting system with our general ledger andmodified our 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 2019 annual meeting of stockholders. We will file the proxy statement with the SEC on or before March 31, 2019.139Table 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 reporting62Reports of independent registered public accounting firm63Consolidated balance sheets as of December 31, 2018 and 201766Consolidated statements of income for the years ended December 31, 2018, 2017, and 201667Consolidated statements of comprehensive income for the years ended December 31, 2018, 2017, and 201668Consolidated statements of equity for the years ended December 31, 2018, 2017, and 201669Consolidated statements of cash flows for the years ended December 31, 2018, 2017, and 201670Notes to consolidated financial statements712. 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: ++2.01—Agreement and Plan of Merger, dated as of October 18, 2018, by and among Valero Energy Corporation; Forest Merger Sub, LLC; ValeroEnergy Partners LP; and Valero Energy Partners GP LLC–incorporated by reference to Exhibit 2.1 to Valero’s Current Report on Form 8-Kdated and filed October 18, 2018 (SEC File No. 1-13175). 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). 140Table of Contents3.08—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). 3.09—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—Indenture, dated as of November 30, 2016, between Valero Energy Partners LP, as issuer, and U.S. Bank National Association, as trustee–incorporated by reference to Exhibit 4.1 to Valero Energy Partners LP’s Post-Effective Amendment No. 1 to Registration Statement onForm S-3 (Registration File No. 333-208052) filed November 30, 2016. 4.06—First Supplemental Indenture (with Parent Guarantee), dated as of January 10, 2019, among Valero Energy Partners LP, as issuer; ValeroEnergy Corporation, as parent guarantor; and U.S. Bank National Association, as trustee–incorporated by reference to Exhibit 4.2 toValero’s Current Report on Form 8-K dated and filed January 10, 2019 (SEC File No. 1-13175). 4.07—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–incorporated by reference to Exhibit 10.01to Valero’s Annual Report on Form 10-K for the year ended December 31, 2017 (SEC File No. 1-13175). +10.02—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). +10.03—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). +10.04—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). +10.05—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). +10.06—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). 141Table of Contents+10.07—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). +10.08—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). +10.09—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). +10.10—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). *+10.11—Schedule of Tier II-A Change of Control Agreements. +10.12—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). +10.13—Form of Performance Share Award Agreement pursuant to the Valero Energy Corporation 2011 Omnibus Stock Incentive Plan–incorporated by reference to Exhibit 10.18 to Valero’s Annual Report on Form 10-K for the year ended December 31, 2017 (SEC File No. 1-13175). +10.14—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). +10.15—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). +10.16—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). 10.17—$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). 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, 2019. *24.01—Power of Attorney dated February 28, 2019 (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–incorporated by reference to Exhibit 99.01 to Valero’s Annual Report on Form 10-K for the yearended December 31, 2017 (SEC File No. 1-13175). ***101—Interactive Data Files142Table 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.++Certain schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The registrant agrees to furnish supplementally a copy of any suchomitted schedule to the SEC upon request.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.143Table 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, 2019144Table of ContentsPOWER OF ATTORNEYKNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Joseph W. Gorder, Donna M.Titzman, and Jason W. Fraser, 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, 2019(Joseph W. Gorder) /s/ Donna M. Titzman Executive Vice Presidentand Chief Financial Officer(Principal Financial and Accounting Officer) February 28, 2019(Donna M. Titzman) /s/ H. Paulett Eberhart Director February 28, 2019(H. Paulett Eberhart) /s/ Kimberly S. Greene Director February 28, 2019(Kimberly S. Greene) /s/ Deborah P. Majoras Director February 28, 2019(Deborah P. Majoras) /s/ Donald L. Nickles Director February 28, 2019(Donald L. Nickles) /s/ Philip J. Pfeiffer Director February 28, 2019(Philip J. Pfeiffer) /s/ Robert A. Profusek Director February 28, 2019(Robert A. Profusek) /s/ Stephen M. Waters Director February 28, 2019(Stephen M. Waters) /s/ Randall J. Weisenburger Director February 28, 2019(Randall J. Weisenburger) /s/ Rayford Wilkins, Jr. Director February 28, 2019(Rayford Wilkins, Jr.) 145Exhibit 10.11SCHEDULE OF TIER II-A CHANGE OF CONTROL AGREEMENTSThe following have executed Tier II-A Change of Control Agreements substantially in the form of the agreement filed as Exhibit 10.18to Valero’s Annual Report on Form 10-K for the year ended December 31, 2016 (SEC File No. 1-13175).Jason W. FraserR. Lane RiggsGary K. SimmonsExhibit 21.01Subsidiaries of Valero Energy Corporationas of February 21, 2019Name of Entity State of Incorporation/Organization AIR BP-PBF DEL PERU SAC PeruBELFAST STORAGE LTD Northern IrelandCANADIAN 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. TexasGCP LOGISTICS COMPANY LLC DelawareGOLDEN EAGLE ASSURANCE LIMITED British ColumbiaHAMMOND MAINLINE PIPELINE LLC DelawareHUNTWAY REFINING COMPANY DelawareMAINLINE PIPELINES LIMITED England and WalesMAPLE ETHANOL LTD. Virgin Islands (U.K.)MICHIGAN 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 DelawarePENTA TANKS TERMINALS S.A. PeruPICKARD PLACE CONDOMINIUM ASSOCIATION MichiganPI DOCK FACILITIES LLC DelawarePORT ARTHUR COKER COMPANY L.P. DelawarePREMCOR USA INC. DelawarePROPERTY RESTORATION, L.P. DelawarePURE BIOFUELS DEL PERU S.A.C. PeruPURE BIOFUELS HOLDINGS L.P. AlbertaSABINE 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 COKER CORPORATION ARUBA N.V. ArubaVALERO CUSTOMS & TRADE SERVICES, INC. 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 FOREST CONTRIBUTION LLC DelawareVALERO GRAIN MARKETING, LLC TexasVALERO 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 PEMBROKESHIRE OIL TERMINAL LTD England and WalesVALERO (PERU) HOLDINGS GP LLC DelawareVALERO (PERU) HOLDINGS LIMITED British ColumbiaVALERO 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 TERMINAL HOLDCO LTD England and WalesVALERO 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 DelawareZELIG COMMERCIAL, INC. PanamaExhibit 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-3ASR (Registration No. 333-224993) and Form S-8 (Registration Nos. 333-106620, 333-129032, 333-136333, 333-174721, and 333-205756) of Valero EnergyCorporation and subsidiaries of our reports dated February 28, 2019, with respect to the consolidated balance sheets of Valero EnergyCorporation and subsidiaries as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensiveincome, equity, and cash flows for each of the years in the three-year period ended December 31, 2018, and the related notes(collectively, the “consolidated financial statements”), and the effectiveness of internal control over financial reporting as ofDecember 31, 2018, which reports appear in the December 31, 2018 annual report on Form 10‑K of Valero Energy Corporation andsubsidiaries./s/ KPMG LLPSan Antonio, TexasFebruary 28, 2019Exhibit 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, 2019/s/ Joseph W. Gorder Joseph W. GorderChief Executive Officer and President Exhibit 31.02CERTIFICATION PURSUANT TO SECTION 302OF THE SARBANES-OXLEY ACT OF 2002I, Donna M. Titzman, 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, 2019/s/ Donna M. Titzman Donna M. TitzmanExecutive 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 31,2018, 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, 2019 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 31,2018, 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/ Donna M. Titzman Donna M. Titzman Executive Vice President and Chief Financial OfficerFebruary 28, 2019 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.

Continue reading text version or see original annual report in PDF format above