ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is management’s perspective of our current financial condition and results of operations, and should be read in conjunction with “ITEM 1A. RISK FACTORS” and “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” included in this report. This discussion and analysis includes the years ended December 31, 2022 and 2021 and comparison between such years. The discussion for the year ended December 31, 2020 and comparison between the years ended December 31, 2021 and 2020 have been omitted from this annual report on Form 10-K for the year ended December 31, 2022, as such information can be found in “ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” in our annual report on Form 10-K for the year ended December 31, 2021, which was filed on February 22, 2022.
CAUTIONARY STATEMENT FOR THE PURPOSE OF SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report, including without limitation our disclosures below under “OVERVIEW AND OUTLOOK,” includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You can identify our forward-looking statements by the words “anticipate,” “believe,” “expect,” “plan,” “intend,” “scheduled,” “estimate,” “project,” “projection,” “predict,” “budget,” “forecast,” “goal,” “guidance,” “target,” “could,” “would,” “should,” “may,” “strive,” “seek,” “potential,” “opportunity,” “aimed,” “considering,” “continue,” and similar expressions.
These forward-looking statements include, among other things, statements regarding:
•the effects and impact of the emergence of new variants of the COVID-19 virus and government responses thereto;
•the effect, impact, potential duration or timing, or other implications of the Russia-Ukraine conflict;
•future Refining segment margins, including gasoline and distillate margins, and discounts;
•future Renewable Diesel segment margins;
•future Ethanol segment margins;
•expectations regarding feedstock costs, including crude oil differentials, product prices for each of our segments, and operating expenses;
•anticipated levels of crude oil and liquid transportation fuel inventories and storage capacity;
•expectations regarding the levels of, and timing with respect to, the production and operations at our existing refineries and plants, and projects under construction;
•our anticipated level of capital investments, including deferred turnaround and catalyst cost expenditures, our expected allocation between, and/or within, growth capital expenditures and sustaining capital expenditures, capital expenditures for environmental and other purposes, and joint venture investments, the expected timing applicable to such capital investments and any related projects, and the effect of those capital investments on our business, financial condition, results of operations, and liquidity;
•our anticipated level of cash distributions or contributions, such as our dividend payment rate and contributions to our qualified pension plans and other postretirement benefit plans;
•our ability to meet future cash requirements, whether from funds generated from our operations or our ability to access financial markets effectively, and our ability to maintain sufficient liquidity;
•our evaluation of, and expectations regarding, any future activity under our share purchase program or transactions involving our debt securities;
•anticipated trends in the supply of, and demand for, crude oil and other feedstocks and refined petroleum products, renewable diesel, and ethanol and corn related co-products in the regions where we operate, as well as globally;
•expectations regarding environmental, tax, and other regulatory matters, including the anticipated amounts and timing of payment with respect to our deferred tax liabilities, matters impacting our ability to repatriate cash held by our foreign subsidiaries, and the anticipated effect thereof on our business, financial condition, results of operations, and liquidity;
•the effect of general economic and other conditions, including inflation and economic activity levels, on refining, renewable diesel, and ethanol industry fundamentals;
•expectations regarding our risk management activities, including the anticipated effects of our hedge transactions;
•expectations regarding our counterparties, including our ability to pass on increased compliance costs and timely collect receivables, and the credit risk within our accounts receivable or accounts payable;
•expectations regarding adoptions of new, or changes to existing, low-carbon fuel standards or policies, blending and tax credits, or efficiency standards that impact demand for renewable fuels; and
•expectations regarding our publicly announced GHG emissions reduction/displacement targets and our current and any future low-carbon projects.
We based our forward-looking statements on our current expectations, estimates, and projections about ourselves, our industry, and the global economy and financial markets generally. We caution that these statements are not guarantees of future performance or results and involve known and unknown risks and uncertainties, the ultimate outcomes of which we cannot predict with certainty. In addition, we based many of these forward-looking statements on assumptions about future events, the ultimate outcomes of which we cannot predict with certainty and which may prove to be inaccurate. Accordingly, actual performance or results may differ materially from the future performance or results that we have expressed, suggested, or forecast in the forward-looking statements. Differences between actual performance or results and any future performance or results expressed, suggested, or forecast in these forward-looking statements could result from a variety of factors, including the following:
•the effects arising out of the Russia-Ukraine conflict, including with respect to changes in trade flows and impacts to crude oil and other markets;
•demand for, and supplies of, refined petroleum products (such as gasoline, diesel, jet fuel, and petrochemicals), renewable diesel, and ethanol and corn related co-products;
•demand for, and supplies of, crude oil and other feedstocks;
•the effects of public health threats, pandemics, and epidemics, such as the COVID-19 pandemic and variants of the virus, governmental and societal responses thereto, and the adverse impacts of the foregoing on our business, financial condition, results of operations, and liquidity, and the global economy and financial markets generally;
•acts of terrorism aimed at either our refineries and plants or third-party facilities that could impair our ability to produce or transport refined petroleum products, renewable diesel, ethanol, or corn related co-products, to receive feedstocks, or otherwise operate efficiently;
•the effects of war or hostilities, and political and economic conditions, in countries that produce crude oil or other feedstocks or consume refined petroleum products, renewable diesel, ethanol or corn related co-products;
•the ability of the members of OPEC to agree on and to maintain crude oil price and production controls;
•the level of consumer demand, consumption, and overall economic activity, including the effects from seasonal fluctuations and market prices;
•refinery, renewable diesel plant, or ethanol plant overcapacity or undercapacity;
•the risk that any transactions may not provide the anticipated benefits or may result in unforeseen detriments;
•the actions taken by competitors, including both pricing and adjustments to refining capacity or renewable fuels production in response to market conditions;
•the level of competitors’ imports into markets that we supply;
•accidents, unscheduled shutdowns, weather events, civil unrest, expropriation of assets, and other economic, diplomatic, legislative, or political events or developments, terrorism, cyberattacks, or other catastrophes or disruptions affecting our operations, production facilities, machinery, pipelines and other logistics assets, equipment, or information systems, or any of the foregoing of our suppliers, customers, or third-party service providers;
•changes in the cost or availability of transportation or storage capacity for feedstocks and our products;
•political pressure and influence of environmental groups and other stakeholders upon policies and decisions related to the production, transportation, storage, refining, processing, marketing, and sales of crude oil or other feedstocks, refined petroleum products, renewable diesel, ethanol, or corn related co-products;
•the price, availability, technology related to, and acceptance of alternative fuels and alternative-fuel vehicles, as well as sentiment and perceptions with respect to GHG emissions more generally;
•the levels of government subsidies for, and executive orders, mandates, or other policies with respect to, alternative fuels, alternative-fuel vehicles, and other low-carbon technologies or initiatives, including those related to carbon capture, carbon sequestration, and low-carbon fuels, or affecting the price of natural gas and/or electricity;
•the volatility in the market price of compliance credits (primarily RINs needed to comply with the RFS) under the Renewable and Low-Carbon Fuel Programs and emission credits needed under other environmental emissions programs;
•delay of, cancellation of, or failure to implement planned capital or other projects and realize the various assumptions and benefits projected for such projects or cost overruns in constructing such planned capital projects;
•earthquakes, hurricanes, tornadoes, winter storms, and other weather events, which can unforeseeably affect the price or availability of electricity, natural gas, crude oil, waste and renewable feedstocks, corn, and other feedstocks, critical supplies, refined petroleum products, renewable diesel, and ethanol;
•rulings, judgments, or settlements in litigation or other legal or regulatory matters, including unexpected environmental remediation costs, in excess of any reserves or insurance coverage;
•legislative or regulatory action, including the introduction or enactment of legislation or rulemakings by government authorities, environmental regulations, changes to income tax rates, introduction of a global minimum tax, windfall taxes or penalties, tax changes or restrictions impacting the foreign repatriation of cash, actions implemented under the Renewable and Low-Carbon Fuel Programs and other environmental emissions programs, including changes to volume requirements or other obligations or exemptions under the RFS, and actions arising from
the EPA’s or other government agencies’ regulations, policies, or initiatives concerning GHGs, including mandates for or bans of specific technology, which may adversely affect our business or operations;
•changing economic, regulatory, and political environments and related events in the various countries in which we operate or otherwise do business, including trade restrictions, expropriation or impoundment of assets, failure of foreign governments and state-owned entities to honor their contracts, property disputes, economic instability, restrictions on the transfer of funds, duties and tariffs, transportation delays, import and export controls, labor unrest, security issues involving key personnel, and decisions, investigations, regulations, issuances or revocations of permits and other authorizations, and other actions, policies, and initiatives by the states, counties, cities, and other jurisdictions in the countries in which we operate or otherwise do business;
•changes in the credit ratings assigned to our debt securities and trade credit;
•the operating, financing, and distribution decisions of our joint ventures or other joint venture members that we do not control;
•changes in currency exchange rates, including the value of the Canadian dollar, the pound sterling, the euro, the Mexican peso, and the Peruvian sol relative to the U.S. dollar;
•the adequacy of capital resources and liquidity, including availability, timing, and amounts of cash flow or our ability to borrow or access financial markets;
•the costs, disruption, and diversion of resources associated with campaigns and negative publicity commenced by investors, stakeholders, or other interested parties;
•overall economic conditions, including the stability and liquidity of financial markets, and the effect thereof on consumer demand; and
•other factors generally described in the “RISK FACTORS” section included in “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 any forward-looking statements ultimately prove to be accurate. Our forward-looking statements are not guarantees of future performance, and actual results and future performance may differ materially from those expressed, suggested, or forecast in any forward-looking statements. Such forward-looking statements speak only as of the date of this annual report on Form 10-K and we do not intend to update these statements unless we are required by applicable securities laws to do so.
All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing, as it may be updated or modified by our future filings with the SEC. We undertake no obligation to publicly release any revisions to any such forward-looking statements that may be made to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events unless we are required by applicable securities laws to do so.
NON-GAAP FINANCIAL MEASURES
The discussions in “OVERVIEW AND OUTLOOK,” “RESULTS OF OPERATIONS,” and “LIQUIDITY AND CAPITAL RESOURCES” below include references to financial measures that are not defined under U.S. generally accepted accounting principles (GAAP). These non-GAAP financial measures include adjusted operating income (including adjusted operating income for each of our reportable segments, as applicable); Refining, Renewable Diesel, and Ethanol segment margin; and capital investments attributable to Valero. We have included these non-GAAP financial measures to help facilitate the comparison of operating results between years, to help assess our cash flows, and because we believe they provide useful information as discussed further below. See the tables in note (h)
beginning on page 52 for reconciliations of adjusted operating income (including adjusted operating income for each of our reportable segments, as applicable) and Refining, Renewable Diesel, and Ethanol segment margin to their most directly comparable GAAP financial measures. Also in note (h), we disclose the reasons why we believe our use of such non-GAAP financial measures provides useful information. See the table on page 60 for a reconciliation of capital investments attributable to Valero to its most directly comparable GAAP financial measure. On page 59, we disclose the reasons why we believe our use of this non-GAAP financial measure provides useful information.
OVERVIEW AND OUTLOOK
Overview
Business Operations Update
Our results for the year ended December 31, 2022 were favorably impacted by the effect from the ongoing recovery in the worldwide demand for petroleum-based transportation fuels while the worldwide supply of those products remained constrained. This supply and demand imbalance has contributed to increases in the market prices of petroleum-based transportation fuels (as well as crude oil and other feedstocks that are processed to make these products) and thus in refining margins. Supply has remained constrained for a variety of reasons, including, but not limited to, effects from refinery closures and disruptions in the crude oil and petroleum-based products markets resulting from the Russia-Ukraine conflict. Refineries closed over the last two years and other refineries ceased crude oil processing and are transitioning to renewable fuel production. In addition, these negative impacts to the supply of petroleum-based products were exacerbated during the second quarter of 2022 by the Russia-Ukraine conflict as a result of countries and private market participants responding to the conflict by taking actions to refrain from purchasing and transporting Russian crude oil and petroleum-based products; however, some of the uncertainties and related impacts began dissipating throughout the last six months of 2022.
The strong demand for our products and the increase in refining margins were the primary contributors to to us reporting $11.5 billion of net income attributable to Valero stockholders for the year ended December 31, 2022. Our operating results for 2022, including operating results by segment, are described in the summary on the following page, and detailed descriptions can be found below under “RESULTS OF OPERATIONS.”
Our operations generated $12.6 billion of cash in 2022. This cash was used to make $2.7 billion of capital investments in our business and return $6.1 billion to our stockholders through purchases of common stock for treasury and dividend payments. In addition, we completed various debt reduction and refinancing transactions that reduced our debt by approximately $2.7 billion in 2022, as described in Note 8 of Notes to Consolidated Financial Statements. As a result of this activity, our cash and cash equivalents increased by $740 million during 2022 to $4.9 billion as of December 31, 2022. We had $10.1 billion in liquidity as of December 31, 2022. The components of our liquidity and descriptions of our cash flows, capital investments, and other matters impacting our liquidity and capital resources can be found below under “LIQUIDITY AND CAPITAL RESOURCES.”
Results for the Year Ended December 31, 2022
For 2022, we reported net income attributable to Valero stockholders of $11.5 billion compared to $930 million for 2021. The increase of $10.6 billion was primarily due to an increase in operating income of $13.6 billion, partially offset by an increase in income tax expense of $3.2 billion. The details of our operating income and adjusted operating income by segment and in total are reflected below. Adjusted operating income excludes the adjustments reflected in the tables in note (h) beginning on page 52. | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | Change |
| Refining segment: | | | | | |
| Operating income | $ | 15,803 | | | $ | 1,862 | | | $ | 13,941 | |
| Adjusted operating income | 15,762 | | | 1,944 | | | 13,818 | |
| Renewable Diesel segment: | | | | | |
| Operating income | 774 | | | 709 | | | 65 | |
| Adjusted operating income | 774 | | | 712 | | | 62 | |
| Ethanol segment: | | | | | |
| Operating income | 110 | | | 473 | | | (363) | |
| Adjusted operating income | 151 | | | 522 | | | (371) | |
| Total company: | | | | | |
| Operating income | 15,690 | | | 2,130 | | | 13,560 | |
| Adjusted operating income | 15,710 | | | 2,264 | | | 13,446 | |
While our operating income increased by $13.6 billion in 2022 compared to 2021, adjusted operating income increased by $13.4 billion primarily due to the following:
•Refining segment. Refining segment adjusted operating income increased by $13.8 billion primarily due to higher gasoline and distillate (primarily diesel) margins and higher throughput volumes, partially offset by lower margins on other products and higher operating expenses (excluding depreciation and amortization expense).
•Renewable Diesel segment. Renewable Diesel segment adjusted operating income increased by $62 million primarily due to higher sales volumes and higher renewable diesel prices, partially offset by higher feedstock costs, an unfavorable impact from commodity derivative instruments associated with our price risk management activities, higher operating expenses (excluding depreciation and amortization expense), and higher depreciation and amortization expense.
•Ethanol segment. Ethanol segment adjusted operating income decreased by $371 million primarily due to higher corn prices and higher operating expenses (excluding depreciation and amortization expense), partially offset by higher ethanol and corn related co-product prices.
Outlook
Many uncertainties remain with respect to the supply and demand imbalance in the petroleum-based products market worldwide, and while it is difficult to predict the ultimate economic impacts this may have on us, we have noted several factors below that have impacted or may impact our results of operations during the first quarter of 2023.
•Gasoline and diesel demand have returned to near pre-pandemic levels and are expected to follow typical seasonal patterns. Jet fuel demand continues to improve, but remains below pre-pandemic levels.
•Light product (gasoline, diesel, and jet fuel) inventories in the U.S. and Europe are below historical levels and should support continued high utilization of refining capacity.
•Crude oil discounts are expected to remain near current levels absent changes in crude oil supply or availability.
•Renewable diesel margins are expected to remain consistent with current levels. Following the start-up of the DGD Port Arthur Plant in the fourth quarter of 2022, DGD’s combined renewable diesel production capacity increased by 470 million gallons per year, from 700 million gallons to approximately 1.2 billion gallons per year.
•Ethanol demand is expected to follow typical seasonal patterns.
RESULTS OF OPERATIONS
The following tables, including the reconciliations of non-GAAP financial measures to their most directly comparable GAAP financial measures in note (h) beginning on page 52, highlight our results of operations, our operating performance, and market reference prices that directly impact our operations. Note references in this section can be found on pages 50 through 55.
Financial Highlights by Segment and Total Company
(millions of dollars)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2022 |
| Refining | | Renewable
Diesel | | Ethanol | | Corporate
and
Eliminations | | Total |
| Revenues: | | | | | | | | | |
| Revenues from external customers | $ | 168,154 | | | $ | 3,483 | | | $ | 4,746 | | | $ | — | | | $ | 176,383 | |
| Intersegment revenues | 56 | | | 2,018 | | | 740 | | | (2,814) | | | — | |
| Total revenues | 168,210 | | | 5,501 | | | 5,486 | | | (2,814) | | | 176,383 | |
| Cost of sales: | | | | | | | | | |
| Cost of materials and other (a) | 144,588 | | | 4,350 | | | 4,628 | | | (2,796) | | | 150,770 | |
| | | | | | | | | |
Operating expenses (excluding depreciation and amortization expense reflected below) | 5,509 | | | 255 | | | 625 | | | — | | | 6,389 | |
| Depreciation and amortization expense (c) | 2,247 | | | 122 | | | 59 | | | — | | | 2,428 | |
| Total cost of sales | 152,344 | | | 4,727 | | | 5,312 | | | (2,796) | | | 159,587 | |
| Asset impairment loss (d) | — | | | — | | | 61 | | | — | | | 61 | |
| Other operating expenses | 63 | | | — | | | 3 | | | — | | | 66 | |
General and administrative expenses (excluding depreciation and amortization expense reflected below) (e) | — | | | — | | | — | | | 934 | | | 934 | |
| Depreciation and amortization expense | — | | | — | | | — | | | 45 | | | 45 | |
| | | | | | | | | |
| Operating income by segment | $ | 15,803 | | | $ | 774 | | | $ | 110 | | | $ | (997) | | | 15,690 | |
| Other income, net (f) | | | | | | | | | 179 | |
Interest and debt expense, net of capitalized interest | | | | | | | | | (562) | |
| Income before income tax expense | | | | | | | | | 15,307 | |
| Income tax expense (g) | | | | | | | | | 3,428 | |
| Net income | | | | | | | | | 11,879 | |
Less: Net income attributable to noncontrolling interests | | | | | | | | | 351 | |
Net income attributable to Valero Energy Corporation stockholders | | | | | | | | | $ | 11,528 | |
Financial Highlights by Segment and Total Company (continued)
(millions of dollars)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2021 |
| Refining | | Renewable
Diesel | | Ethanol | | Corporate
and
Eliminations | | Total |
| Revenues: | | | | | | | | | |
Revenues from external customers | $ | 106,947 | | | $ | 1,874 | | | $ | 5,156 | | | $ | — | | | $ | 113,977 | |
Intersegment revenues | 14 | | | 468 | | | 433 | | | (915) | | | — | |
Total revenues | 106,961 | | | 2,342 | | | 5,589 | | | (915) | | | 113,977 | |
| Cost of sales: | | | | | | | | | |
| Cost of materials and other (b) | 97,759 | | | 1,438 | | | 4,428 | | | (911) | | | 102,714 | |
| | | | | | | | | |
Operating expenses (excluding depreciation and amortization expense reflected below) (b) | 5,088 | | | 134 | | | 556 | | | (2) | | | 5,776 | |
| Depreciation and amortization expense (c) | 2,169 | | | 58 | | | 131 | | | — | | | 2,358 | |
Total cost of sales | 105,016 | | | 1,630 | | | 5,115 | | | (913) | | | 110,848 | |
| Other operating expenses | 83 | | | 3 | | | 1 | | | — | | | 87 | |
General and administrative expenses (excluding depreciation and amortization expense reflected below) | — | | | — | | | — | | | 865 | | | 865 | |
| Depreciation and amortization expense | — | | | — | | | — | | | 47 | | | 47 | |
| Operating income by segment | $ | 1,862 | | | $ | 709 | | | $ | 473 | | | $ | (914) | | | 2,130 | |
| Other income, net (f) | | | | | | | | | 16 | |
Interest and debt expense, net of capitalized interest | | | | | | | | | (603) | |
| Income before income tax expense | | | | | | | | | 1,543 | |
| Income tax expense (g) | | | | | | | | | 255 | |
| Net income | | | | | | | | | 1,288 | |
Less: Net income attributable to noncontrolling interests | | | | | | | | | 358 | |
Net income attributable to Valero Energy Corporation stockholders | | | | | | | | | $ | 930 | |
Average Market Reference Prices and Differentials
| | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | | |
| Refining | | | | | | |
| Feedstocks (dollars per barrel) | | | | | | |
| Brent crude oil | $ | 98.86 | | | $ | 70.79 | | | | |
| Brent less West Texas Intermediate (WTI) crude oil | 4.43 | | | 2.83 | | | | |
| Brent less WTI Houston crude oil | 2.82 | | | 1.91 | | | | |
| Brent less Dated Brent crude oil | (2.22) | | | 0.03 | | | | |
| Brent less Alaska North Slope (ANS) crude oil | 0.06 | | | 0.35 | | | | |
| Brent less Argus Sour Crude Index crude oil | 7.42 | | | 3.92 | | | | |
| Brent less Maya crude oil | 11.68 | | | 6.48 | | | | |
| Brent less Western Canadian Select Houston crude oil | 15.55 | | | 7.40 | | | | |
| WTI crude oil | 94.43 | | | 67.97 | | | | |
| | | | | | |
| Natural gas (dollars per million British Thermal Units) | 5.83 | | | 7.85 | | | |
| | | | | | |
| Product margins (dollars per barrel) | | | | | | |
| U.S. Gulf Coast: | | | | | | |
| CBOB gasoline less Brent | 17.26 | | | 13.66 | | | | |
| Ultra-low-sulfur (ULS) diesel less Brent | 46.45 | | | 13.75 | | | | |
| Propylene less Brent | (42.73) | | | (6.43) | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| U.S. Mid-Continent: | | | | | | |
| CBOB gasoline less WTI | 23.60 | | | 17.36 | | | | |
| ULS diesel less WTI | 51.83 | | | 18.70 | | | | |
| North Atlantic: | | | | | | |
| CBOB gasoline less Brent | 26.96 | | | 16.89 | | | | |
| ULS diesel less Brent | 57.01 | | | 15.91 | | | | |
| U.S. West Coast: | | | | | | |
| CARBOB 87 gasoline less ANS | 39.10 | | | 24.17 | | | | |
| CARB diesel less ANS | 48.75 | | | 17.60 | | | | |
| CARBOB 87 gasoline less WTI | 43.47 | | | 26.64 | | | | |
| CARB diesel less WTI | 53.12 | | | 20.08 | | | | |
Average Market Reference Prices and Differentials (continued)
| | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | |
| Renewable Diesel | | | | | |
New York Mercantile Exchange ULS diesel (dollars per gallon) | $ | 3.54 | | | $ | 2.07 | | | |
| Biodiesel RIN (dollars per RIN) | 1.67 | | | 1.49 | | | |
| California LCFS (dollars per metric ton) | 98.73 | | | 177.78 | | | |
| Chicago Board of Trade (CBOT) soybean oil (dollars per pound) | 0.71 | | | 0.58 | | | |
| | | | | |
| Ethanol | | | | | |
| | | | | |
| CBOT corn (dollars per bushel) | 6.94 | | | 5.80 | | | |
| New York Harbor ethanol (dollars per gallon) | 2.57 | | | 2.49 | | | |
2022 Compared to 2021
Total Company, Corporate, and Other
The following table includes selected financial data for the total company, corporate, and other for 2022 and 2021. The selected financial data is derived from the Financial Highlights by Segment and Total Company tables, unless otherwise noted.
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | Change |
| Revenues | $ | 176,383 | | | $ | 113,977 | | | $ | 62,406 | |
| | | | | |
| | | | | |
| | | | | |
| Cost of sales (see notes (a) through (c)) | 159,587 | | | 110,848 | | | 48,739 | |
General and administrative expenses (excluding depreciation and amortization expense) (see note (e)) | 934 | | | 865 | | | 69 | |
| | | | | |
| | | | | |
| Operating income | 15,690 | | | 2,130 | | | 13,560 | |
| Adjusted operating income (see note (h)) | 15,710 | | | 2,264 | | | 13,446 | |
| Other income, net (see note (f)) | 179 | | | 16 | | | 163 | |
| | | | | |
| Income tax expense (see note (g)) | 3,428 | | | 255 | | | 3,173 | |
| | | | | |
| | | | | |
Revenues increased by $62.4 billion in 2022 compared to 2021 primarily due to increases in product prices for the petroleum-based transportation fuels associated with sales made by our Refining segment. This increase in revenues was partially offset by an increase in cost of sales of $48.7 billion, which was primarily due to increases in crude oil and other feedstock costs, and an increase in general and administrative expenses (excluding depreciation and amortization expense) of $69 million, which was primarily due to an increase of $30 million in certain employee compensation expenses and a charge of $20 million for an environmental reserve adjustment (see note (e)). These changes resulted in a $13.6 billion increase in operating income, from $2.1 billion in 2021 to $15.7 billion in 2022.
Adjusted operating income increased by $13.4 billion, from $2.3 billion in 2021 to $15.7 billion in 2022. The components of this $13.4 billion increase in adjusted operating income are discussed by segment in the segment analyses that follow.
“Other income, net” increased by $163 million in 2022 compared to 2021 due to the items noted in the following table (see note (f) for explanations of these components):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | Change |
Net benefit (charge) from early redemption and retirement of debt | $ | 14 | | | $ | (193) | | | $ | 207 | |
| Pension settlement charge | (58) | | | — | | | (58) | |
Asset impairment loss associated with the cancellation of a pipeline extension project by Diamond Pipeline LLC (a nonconsolidated joint venture) | — | | | (24) | | | 24 |
Gain on sale of a 24.99 percent membership interest in MVP Terminalling, LLC (MVP) (a nonconsolidated joint venture) | — | | | 62 | | | (62) | |
| Interest income, equity income on joint ventures, and other | 223 | | | 171 | | | 52 | |
| Other income, net | $ | 179 | | | $ | 16 | | | $ | 163 | |
Income tax expense increased by $3.2 billion in 2022 compared to 2021 primarily as a result of an increase in income before income tax expense.
Refining Segment Results
The following table includes selected financial and operating data of our Refining segment for 2022 and 2021. The selected financial data is derived from the Financial Highlights by Segment and Total Company tables, unless otherwise noted.
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | Change |
| Operating income | $ | 15,803 | | | $ | 1,862 | | | $ | 13,941 | |
| Adjusted operating income (see note (h)) | 15,762 | | | 1,944 | | | 13,818 | |
| | | | | |
| | | | | |
| Refining margin (see note (h)) | $ | 23,518 | | | $ | 9,201 | | | $ | 14,317 | |
Operating expenses (excluding depreciation and amortization expense reflected below) (see note (b)) | 5,509 | | | 5,088 | | | 421 | |
| Depreciation and amortization expense | 2,247 | | | 2,169 | | | 78 | |
| | | | | |
| Throughput volumes (thousand BPD) (see note (i)) | 2,953 | | | 2,787 | | | 166 | |
Refining segment operating income increased by $13.9 billion in 2022 compared to 2021; however, Refining segment adjusted operating income, which excludes the adjustments in the table in note (h), increased by $13.8 billion in 2022 compared to 2021. The components of this increase in the adjusted results, along with the reasons for the changes in those components, are outlined below.
•Refining segment margin increased by $14.3 billion in 2022 compared to 2021.
Refining segment margin is primarily affected by the prices for the petroleum-based transportation fuels that we sell and the cost of crude oil and other feedstocks that we process. The table on page 45 reflects market reference prices and differentials that we believe had a material impact on the change in our Refining segment margin in 2022 compared to 2021.
The increase in Refining segment margin was primarily due to the following:
◦An increase in distillate (primarily diesel) margins had a favorable impact of approximately $11.8 billion.
◦An increase in gasoline margins had a favorable impact of approximately $2.4 billion.
◦An increase in throughput volumes of 166,000 barrels per day had a favorable impact of approximately $1.3 billion.
◦Lower margins on other products had an unfavorable impact of approximately $1.1 billion.
•Refining segment operating expenses (excluding depreciation and amortization expense) increased by $421 million primarily due to increases in costs of compliance with environmental emissions programs associated with the operations of certain of our refineries of $121 million, chemicals and catalyst costs of $103 million, energy costs of $89 million, and maintenance expense of $84 million.
Renewable Diesel Segment Results
The following table includes selected financial and operating data of our Renewable Diesel segment for 2022 and 2021. The selected financial data is derived from the Financial Highlights by Segment and Total Company tables, unless otherwise noted.
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | Change |
| Operating income | $ | 774 | | | $ | 709 | | | $ | 65 | |
| Adjusted operating income (see note (h)) | 774 | | | 712 | | | 62 | |
| | | | | |
| | | | | |
| Renewable Diesel margin (see note (h)) | $ | 1,151 | | | $ | 904 | | | $ | 247 | |
Operating expenses (excluding depreciation and amortization expense reflected below) | 255 | | | 134 | | | 121 | |
| Depreciation and amortization expense | 122 | | | 58 | | | 64 | |
| | | | | |
| Sales volumes (thousand gallons per day) (see note (i)) | 2,175 | | | 1,014 | | | 1,161 | |
Renewable Diesel segment operating income increased by $65 million in 2022 compared to 2021; however, Renewable Diesel segment adjusted operating income, which excludes the adjustment in the table in note (h), increased by $62 million in 2022 compared to 2021. The components of this increase in the adjusted results, along with the reasons for the changes in those components, are outlined below.
•Renewable Diesel segment margin increased by $247 million in 2022 compared to 2021.
Renewable Diesel segment margin is primarily affected by the price for the renewable diesel that we sell and the cost of the feedstocks that we process. The table on page 46 reflects market reference prices that we believe had a material impact on the change in our Renewable Diesel segment margin in 2022 compared to 2021.
The increase in Renewable Diesel segment margin was primarily due to the following:
◦An increase in sales volumes of 1.2 million gallons per day had a favorable impact of approximately $1.3 billion. The increase in sales volumes was primarily due to the additional production capacity resulting from the expansion of the DGD St. Charles Plant and the completion of the new DGD Port Arthur Plant that commenced operations in the fourth quarters of 2021 and 2022, respectively.
◦Higher renewable diesel prices had a favorable impact of approximately $749 million.
◦An increase in the cost of the feedstocks we process had an unfavorable impact of approximately $1.6 billion.
◦Price risk management activities had an unfavorable impact of $241 million. We recognized a loss of $287 million in 2022 compared to a loss of $46 million in 2021.
•Renewable Diesel segment operating expenses (excluding depreciation and amortization expense) increased by $121 million primarily due to increased costs resulting from the expansion of the DGD St. Charles Plant and the completion of the DGD Port Arthur Plant that commenced operations in the fourth quarters of 2021 and 2022, respectively.
•Renewable Diesel segment depreciation and amortization expense increased by $64 million primarily due to depreciation expense of $44 million associated with the expansion of the DGD St. Charles Plant that commenced operations in the fourth quarter of 2021 and an increase in depreciation expense of $14 million associated with finance leases.
Ethanol Segment Results
The following table includes selected financial and operating data of our Ethanol segment for 2022 and 2021. The selected financial data is derived from the Financial Highlights by Segment and Total Company tables, unless otherwise noted.
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | Change |
| Operating income | $ | 110 | | | $ | 473 | | | $ | (363) | |
| Adjusted operating income (see note (h)) | 151 | | | 522 | | | (371) | |
| | | | | |
| Ethanol margin (see note (h)) | $ | 858 | | | $ | 1,161 | | | $ | (303) | |
Operating expenses (excluding depreciation and amortization expense reflected below) (see note (b)) | 625 | | | 556 | | | 69 | |
| Depreciation and amortization expense (see note (c)) | 59 | | | 131 | | | (72) | |
| Asset impairment loss (see note (d)) | 61 | | | — | | | 61 | |
| | | | | |
| Production volumes (thousand gallons per day) (see note (i)) | 3,866 | | | 3,949 | | | (83) | |
Ethanol segment operating income decreased by $363 million in 2022 compared to 2021; however, Ethanol segment adjusted operating income, which excludes the adjustments in the table in note (h),
decreased by $371 million in 2022 compared to 2021. The components of this decrease in the adjusted results, along with the reasons for the changes in these components, are outlined below.
•Ethanol segment margin decreased by $303 million in 2022 compared to 2021.
Ethanol segment margin is primarily affected by prices for the ethanol and corn related co-products that we sell and the cost of corn that we process. The table on page 46 reflects market reference prices that we believe had a material impact on the change in our Ethanol segment margin in 2022 compared to 2021.
The decrease in Ethanol segment margin was primarily due to the following:
◦Higher corn prices had an unfavorable impact of approximately $572 million.
◦Higher prices for the co-products that we produce, primarily DDGs and inedible distillers corn oil, had a favorable impact of approximately $195 million.
◦Higher ethanol prices had a favorable impact of approximately $82 million.
•Ethanol segment operating expenses (excluding depreciation and amortization expense) increased by $69 million primarily due to increases in energy costs of $48 million and chemicals and catalyst expense of $18 million.
________________________
The following notes relate to references on pages 43 through 49.
(a)Under the RFS program, the EPA is required to set annual quotas for the volume of renewable fuels that obligated parties, such as us, must blend into petroleum-based transportation fuels consumed in the U.S. The quotas are used to determine an obligated party’s RVO. The EPA released a final rule on June 3, 2022 that, among other things, modified the volume standards for 2020 and, for the first time, established volume standards for 2021 and 2022.
In 2020, we recognized the cost of the RVO using the 2020 quotas set by the EPA at that time, and in 2021 we recognized the cost of the RVO using our estimates of the quotas. As a result of the final rule released by the EPA as noted above, we recognized a benefit of $104 million in 2022, of which a benefit of $105 million and a net charge of $1 million were related to the modification of the 2020 and 2021 quotas, respectively.
(b)In mid-February 2021, many of our refineries and plants were impacted to varying extents by the severe cold, utility disruptions, and higher energy costs arising out of Winter Storm Uri. The higher energy costs resulted from an increase in the prices of natural gas and electricity that significantly exceeded rates that we consider normal, such as the average rates we incurred the month preceding the storm. As a result, our operating income for the year ended December 31, 2021 includes estimated excess energy costs of $579 million.
The above-mentioned pre-tax estimated excess energy charge is reflected in our statement of income line items and attributable to our reportable segments for the year ended December 31, 2021 as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Refining | | Renewable
Diesel | | Ethanol | | Total |
| Cost of materials and other | $ | 47 | | | $ | — | | | $ | — | | | $ | 47 | |
Operating expenses (excluding depreciation and amortization expense) | 478 | | | — | | | 54 | | | 532 | |
| Total estimated excess energy costs | $ | 525 | | | $ | — | | | $ | 54 | | | $ | 579 | |
(c)Depreciation and amortization expense includes the following:
◦a gain of $23 million in the year ended December 31, 2022 on the sale of our ethanol plant located in Jefferson, Wisconsin (Jefferson ethanol plant); and
◦accelerated depreciation of $48 million in the year ended December 31, 2021 related to a change in the estimated useful life of our Jefferson ethanol plant.
(d)Our ethanol plant located in Lakota, Iowa (Lakota ethanol plant) is currently configured to produce a higher-grade ethanol product, as opposed to fuel-grade ethanol, suitable for hand sanitizer blending or industrial purposes that has a higher market value than fuel-grade ethanol. During 2022, demand for higher-grade ethanol declined and had a negative impact on the profitability of the plant. As a result, we tested the recoverability of the carrying value of the Lakota ethanol plant and concluded that it was impaired. Therefore, we reduced the carrying value of the plant to its estimated fair value and recognized an asset impairment loss of $61 million in the year ended December 31, 2022.
(e)General and administrative expenses (excluding depreciation and amortization expense) for the year ended December 31, 2022 includes a charge of $20 million for an environmental reserve adjustment associated with a non-operating site.
(f)“Other income, net” includes the following:
◦a pension settlement charge of $58 million in the year ended December 31, 2022 resulting from a greater number of employees retiring in 2022 who elected lump sum benefit payments from one of our qualified U.S. defined benefit pension plans than estimated. We believe that the increase in lump sum elections was driven by the negative impact to lump sum payments in 2023 that will result from higher interest rates in 2022;
◦a net benefit of $14 million in the year ended December 31, 2022 related to the early retirement of approximately $3.1 billion aggregate principal amount of various series of our senior notes;
◦a charge of $193 million in the year ended December 31, 2021 related to the early redemption and retirement of approximately $2.1 billion aggregate principal amount of various series of our senior notes;
◦a gain of $62 million in the year ended December 31, 2021 on the sale of a 24.99 percent membership interest in MVP, a nonconsolidated joint venture; and
◦a charge of $24 million in the year ended December 31, 2021 representing our portion of the asset impairment loss recognized by Diamond Pipeline LLC, a nonconsolidated joint venture, resulting from the joint venture’s cancellation of its pipeline extension project.
(g)Income tax expense includes the following:
◦deferred income tax expense of $51 million in the year ended December 31, 2022 associated with the recognition of a deferred tax liability for foreign withholding tax on the anticipated repatriation of cash held by one of our international subsidiaries that we have deemed will not be permanently reinvested in our operations in that country; and
◦deferred income tax expense of $64 million in the year ended December 31, 2021 related to certain statutory income tax rate changes (primarily an increase in the U.K. rate from 19 percent to 25 percent effective in 2023) that were enacted in 2021 and resulted in the remeasurement of our deferred tax liabilities.
(h)We use certain financial measures (as noted below) that are not defined under GAAP and are considered to be non-GAAP financial measures.
We have defined these non-GAAP measures and believe they are useful to the external users of our financial statements, including industry analysts, investors, lenders, and rating agencies. We believe these measures are useful to assess our ongoing financial performance because, when reconciled to their most comparable GAAP measures, they provide improved comparability between periods after adjusting for certain items that we believe are not indicative of our core operating performance and that may obscure our underlying business results and trends. These non-GAAP measures should not be considered as alternatives to their most comparable GAAP measures nor should they be considered in isolation or as a substitute for an analysis of our results of operations as reported under GAAP. In addition, these non-GAAP measures may not be comparable to similarly titled measures used by other companies because we may define them differently, which diminishes their utility.
Non-GAAP financial measures are as follows:
•Refining margin is defined as Refining segment operating income excluding the modification of RVO adjustment, operating expenses (excluding depreciation and amortization expense), depreciation and amortization expense, and other operating expenses, as reflected in the table below.
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | |
| 2022 | | | | 2021 | | | | | | |
Reconciliation of Refining operating income to Refining margin | | | | | | | | | | | |
| Refining operating income | $ | 15,803 | | | | | $ | 1,862 | | | | | | | |
| Adjustments: | | | | | | | | | | | |
| | | | | | | | | | | |
| Modification of RVO (see note (a)) | (104) | | | | | (1) | | | | | | | |
| | | | | | | | | | | |
Operating expenses (excluding depreciation and amortization expense) (see note (b)) | 5,509 | | | | | 5,088 | | | | | | | |
| Depreciation and amortization expense | 2,247 | | | | | 2,169 | | | | | | | |
| Other operating expenses | 63 | | | | | 83 | | | | | | | |
| Refining margin | $ | 23,518 | | | | | $ | 9,201 | | | | | | | |
•Renewable Diesel margin is defined as Renewable Diesel segment operating income excluding operating expenses (excluding depreciation and amortization expense), depreciation and amortization expense, and other operating expenses, as reflected in the table below.
| | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 |
Reconciliation of Renewable Diesel operating income to Renewable Diesel margin | | | |
| Renewable Diesel operating income | $ | 774 | | | $ | 709 | |
| Adjustments: | | | |
Operating expenses (excluding depreciation and amortization expense) | 255 | | | 134 | |
| Depreciation and amortization expense | 122 | | | 58 | |
| Other operating expenses | — | | | 3 | |
| Renewable Diesel margin | $ | 1,151 | | | $ | 904 | |
•Ethanol margin is defined as Ethanol segment operating income excluding operating expenses (excluding depreciation and amortization expense), depreciation and amortization expense, the asset impairment loss, and other operating expenses, as reflected in the table below.
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | |
| 2022 | | | | 2021 | | | | | | |
Reconciliation of Ethanol operating income to Ethanol margin | | | | | | | | | | | |
| Ethanol operating income | $ | 110 | | | | | $ | 473 | | | | | | | |
| Adjustments: | | | | | | | | | | | |
| | | | | | | | | | | |
Operating expenses (excluding depreciation and amortization expense) (see note (b)) | 625 | | | | | 556 | | | | | | | |
| Depreciation and amortization expense (see note (c)) | 59 | | | | | 131 | | | | | | | |
| Asset impairment loss (see note (d)) | 61 | | | | | — | | | | | | | |
| Other operating expenses | 3 | | | | | 1 | | | | | | | |
| Ethanol margin | $ | 858 | | | | | $ | 1,161 | | | | | | | |
•Adjusted Refining operating income is defined as Refining segment operating income excluding the modification of RVO adjustment and other operating expenses, as reflected in the table below.
| | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 |
Reconciliation of Refining operating income to adjusted Refining operating income | | | |
| Refining operating income | $ | 15,803 | | | $ | 1,862 | |
| Adjustments: | | | |
| | | |
| Modification of RVO (see note (a)) | (104) | | | (1) | |
| | | |
| Other operating expenses | 63 | | | 83 | |
| Adjusted Refining operating income | $ | 15,762 | | | $ | 1,944 | |
•Adjusted Renewable Diesel operating income is defined as Renewable Diesel segment operating income excluding other operating expenses, as reflected in the table below.
| | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 |
Reconciliation of Renewable Diesel operating income to adjusted Renewable Diesel operating income | | | |
| Renewable Diesel operating income | $ | 774 | | | $ | 709 | |
| Adjustment: Other operating expenses | — | | | 3 | |
| Adjusted Renewable Diesel operating income | $ | 774 | | | $ | 712 | |
•Adjusted Ethanol operating income is defined as Ethanol segment operating income excluding the gain on sale of ethanol plant, the asset impairment loss, the change in estimated useful life of ethanol plant, and other operating expenses, as reflected in the table below.
| | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 |
Reconciliation of Ethanol operating income to adjusted Ethanol operating income | | | |
| Ethanol operating income | $ | 110 | | | $ | 473 | |
| Adjustments: | | | |
| Gain on sale of ethanol plant (see note (c)) | (23) | | | — | |
| Asset impairment loss (see note (d)) | 61 | | | — | |
Change in estimated useful life of ethanol plant (see note (c)) | — | | | 48 | |
| Other operating expenses | 3 | | | 1 | |
| Adjusted Ethanol operating income | $ | 151 | | | $ | 522 | |
•Adjusted operating income is defined as total company operating income excluding the modification of RVO adjustment, the gain on sale of ethanol plant, the asset impairment loss, the change in estimated useful life of ethanol plant, the environmental reserve adjustment, and other operating expenses, as reflected in the table below.
| | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 |
Reconciliation of total company operating income to adjusted operating income | | | |
| Total company operating income | $ | 15,690 | | | $ | 2,130 | |
| Adjustments: | | | |
| Modification of RVO (see note (a)) | (104) | | | (1) | |
| Gain on sale of ethanol plant (see note (c)) | (23) | | | — | |
| Asset impairment loss (see note (d)) | 61 | | | — | |
Change in estimated useful life of ethanol plant (see note (c)) | — | | | 48 | |
| Environmental reserve adjustment (see note (e)) | 20 | | | — | |
| Other operating expenses | 66 | | | 87 | |
| Adjusted operating income | $ | 15,710 | | | $ | 2,264 | |
(i)We use throughput volumes, sales volumes, and production volumes for the Refining segment, Renewable Diesel segment, and Ethanol segment, respectively, due to their general use by others who operate facilities similar to those included in our segments.
LIQUIDITY AND CAPITAL RESOURCES
Our Liquidity
Our liquidity consisted of the following as of December 31, 2022 (in millions):
| | | | | | | | | | | | | | |
| Available capacity from our committed facilities (a): | | | | | | | | |
| Valero Revolver | | | | | | | | $ | 3,994 | |
| Canadian Revolver (b) | | | | | | | | 107 | |
| Accounts receivable sales facility | | | | | | | | 1,300 | |
| | | | | | | | |
| Total available capacity | | | | | | | | 5,401 | |
| Cash and cash equivalents (c) | | | | | | | | 4,713 | |
Total liquidity | | | | | | | | $ | 10,114 | |
_______________________
(a)Excludes the committed facilities of the consolidated VIEs.
(b)The amount for our Canadian Revolver is shown in U.S. dollars. As set forth in the summary of our credit facilities in Note 8 of Notes to Consolidated Financial Statements, the availability under our Canadian Revolver as of December 31, 2022 in Canadian dollars was C$145 million.
(c)Excludes $149 million of cash and cash equivalents related to the consolidated VIEs that is available for use only by the VIEs.
Information about our outstanding borrowings, letters of credit issued, and availability under our credit facilities is reflected in Note 8 of Notes to Consolidated Financial Statements.
Our debt and financing agreements do not have rating agency triggers that would automatically require us to post additional collateral. However, in the event of certain downgrades of our senior unsecured debt by the ratings agencies, the cost of borrowings under some of our bank credit facilities and other arrangements may increase. As of December 31, 2022, all of our ratings on our senior unsecured debt, including debt guaranteed by us, were at or above investment grade level as follows:
| | | | | | | | |
| Rating Agency | | Rating |
| Moody’s Investors Service | | Baa2 (stable outlook) |
| Standard & Poor’s Ratings Services | | BBB (stable outlook) |
| Fitch Ratings | | BBB (stable outlook) |
We cannot provide assurance that these ratings will remain in effect for any given period of time or that one or more of these ratings will not be lowered or withdrawn entirely by a rating agency. We note that these credit ratings are not recommendations to buy, sell, or hold our securities. Each rating should be evaluated independently of any other rating. Any future reduction below investment grade or withdrawal of one or more of our credit ratings could have a material adverse impact on our ability to obtain short- and long-term financing and the cost of such financings.
We believe we have sufficient funds from operations and from available capacity under our credit facilities to fund our ongoing operating requirements and other commitments over the next 12 months and thereafter for the foreseeable future. We expect that, to the extent necessary, we can raise additional cash through equity or debt financings in the public and private capital markets or the arrangement of additional credit facilities. However, there can be no assurances regarding the availability of any future
financings or additional credit facilities or whether such financings or additional credit facilities can be made available on terms that are acceptable to us.
Cash Flows
Components of our cash flows are set forth below (in millions):
| | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | |
| Cash flows provided by (used in): | | | | | |
| Operating activities | $ | 12,574 | | | $ | 5,859 | | | |
| Investing activities | (2,805) | | | (2,159) | | | |
| Financing activities: | | | | | |
| Debt issuances and borrowings | 3,153 | | | 1,828 | | | |
Repayments of debt and finance lease obligations (including premiums paid on early redemption and retirement of debt) | (6,019) | | | (3,214) | | | |
| Return to stockholders: | | | | | |
| Purchases of common stock for treasury | (4,577) | | | (27) | | | |
| Common stock dividend payments | (1,562) | | | (1,602) | | | |
| Return to stockholders | (6,139) | | | (1,629) | | | |
| Other financing activities | 156 | | | 169 | | | |
| Financing activities | (8,849) | | | (2,846) | | | |
| Effect of foreign exchange rate changes on cash | (180) | | | (45) | | | |
| Net increase in cash and cash equivalents | $ | 740 | | | $ | 809 | | | |
Cash Flows for the Year Ended December 31, 2022
In 2022, we used the $12.6 billion of cash generated by our operations and the $3.2 billion in debt issuances and borrowings to make $2.8 billion of investments in our business, repay $6.0 billion of debt and finance lease obligations (including premiums paid on the early retirement of debt), return $6.1 billion to our stockholders through purchases of our common stock for treasury and dividend payments, and increase our available cash on hand by $740 million. The debt issuance, borrowings, and repayments are described in Note 8 of Notes to Consolidated Financial Statements.
As previously noted, our operations generated $12.6 billion of cash in 2022, driven primarily by net income of $11.9 billion and noncash charges to income of $2.3 billion, partially offset by an unfavorable change in working capital of $1.6 billion. Noncash charges primarily included $2.5 billion of depreciation and amortization expense, $50 million of deferred income tax expense, and a $61 million asset impairment loss associated with our Lakota ethanol plant, as described in Note 5 of Notes to Consolidated Financial Statements. Details regarding the components of the change in working capital, along with the reasons for the changes in those components, are described in Note 17 of Notes to Consolidated Financial Statements. In addition, see “RESULTS OF OPERATIONS” for an analysis of the significant components of our net income.
Our investing activities of $2.8 billion primarily consisted of $2.7 billion in capital investments, as defined below under “Capital Investments,” of which $879 million related to capital investments made by DGD and $40 million related to capital expenditures of VIEs other than DGD.
Cash Flows for the Year Ended December 31, 2021
In 2021, we used the $5.9 billion of cash generated by our operations and the $1.8 billion in debt issuances and borrowings to make $2.2 billion of investments in our business, repay $3.2 billion of debt and finance lease obligations (including premiums paid on the early redemption and retirement of debt), return $1.6 billion to our stockholders through purchases of our common stock for treasury and dividend payments, and increase our available cash on hand by $809 million. The debt issuances, borrowings, and repayments are described in Note 8 of Notes to Consolidated Financial Statements.
As previously noted, our operations generated $5.9 billion of cash in 2021, driven primarily by noncash charges to income of $2.3 billion, a positive change in working capital of $2.2 billion, and net income of $1.3 billion. Noncash charges primarily included $2.4 billion of depreciation and amortization expense and a $193 million loss on the early redemption and retirement of debt, partially offset by a $126 million deferred income tax benefit and a $62 million gain on the sale of a partial interest in MVP, as described in Note 11 of Notes to Consolidated Financial Statements. Details regarding the components of the change in working capital, along with the reasons for the changes in those components, are described in Note 17 of Notes to Consolidated Financial Statements. In addition, see “RESULTS OF OPERATIONS” for an analysis of the significant components of our net income.
Our investing activities of $2.2 billion consisted of $2.5 billion in capital investments, of which $1.0 billion related to capital investments made by DGD and $110 million related to capital expenditures of VIEs other than DGD. These activities were partially offset by $270 million of proceeds received from the sale of a partial interest in MVP, as described in Note 12 of Notes to Consolidated Financial Statements.
Our Capital Resources
Our material cash requirements as of December 31, 2022 primarily consist of working capital requirements, capital investments, contractual obligations, and other matters, as described below. Our operations have historically generated positive cash flows to fulfill our working capital requirements and other uses of cash as discussed below.
Capital Investments
Capital investments are comprised of our capital expenditures, deferred turnaround and catalyst cost expenditures, and investments in nonconsolidated joint ventures, as reflected in our consolidated statements of cash flows as shown on page 75. Capital investments exclude strategic investments or acquisitions, if any.
We also identify our capital investments by the nature of the project with which the expenditure is associated as follows:
•Sustaining capital investments are generally associated with projects that are expected to extend the lives of our property assets, sustain their operating capabilities and safety (including deferred turnaround and catalyst cost expenditures), or comply with regulatory requirements. Regulatory compliance capital investments are generally associated with projects that are incurred to comply with government regulatory requirements, such as requirements to reduce emissions and prohibited elements from our products.
•Growth capital investments, including low-carbon growth capital investments that support the development and growth of our low-carbon renewable diesel and ethanol businesses, are generally associated with projects for the construction of new property assets that are expected to
enhance our profitability and cash-generating capabilities, including investments in nonconsolidated joint ventures.
We have developed an extensive multi-year capital investment program, which we update and revise based on changing internal and external factors. The following table reflects our expected capital investments for the year ending December 31, 2023 by nature of the project and reportable segment, along with historical amounts for the years ended December 31, 2022 and 2021 (in millions). The following table also reflects capital investments attributable to Valero, which is a non-GAAP measure that we define and reconcile to capital investments below under “Capital Investments Attributable to Valero.”
| | | | | | | | | | | | | | | | | |
| Year Ending
December 31,
2023 (a) | | Year Ended
December 31, |
| | 2022 | | 2021 |
| Capital investments by nature of the project (b): | | | | | |
| Sustaining capital investments | $ | 1,595 | | | $ | 1,368 | | | $ | 1,129 | |
| Growth capital investments: | | | | | |
| Low-carbon growth capital investments | 225 | | | 836 | | | 1,042 | |
| Other growth capital investments | 200 | | | 534 | | | 296 | |
| Total growth capital investments | 425 | | | 1,370 | | | 1,338 | |
| Total capital investments | $ | 2,020 | | | $ | 2,738 | | | $ | 2,467 | |
| Capital investments by segment: | | | | | |
| Refining | $ | 1,570 | | | $ | 1,764 | | | $ | 1,378 | |
| Renewable Diesel | 280 | | | 879 | | | 1,048 | |
| Ethanol | 70 | | | 22 | | | 15 | |
| Corporate | 100 | | | 73 | | | 26 | |
| Total capital investments | 2,020 | | | 2,738 | | | 2,467 | |
| Adjustments: | | | | | |
Renewable Diesel capital investments attributable to the other joint venture member in DGD | (140) | | | (439) | | | (524) | |
| Capital expenditures of other VIEs | — | | | (40) | | | (110) | |
| Capital investments attributable to Valero | $ | 1,880 | | | $ | 2,259 | | | $ | 1,833 | |
________________________
(a)All expected amounts for the year ending December 31, 2023 exclude capital expenditures that the consolidated VIEs (other than DGD) may incur because we do not operate those VIEs.
(b)Capital investments attributable to Valero by nature of the project are as follows (in millions):
| | | | | | | | | | | | | | | | | |
| Year Ending
December 31,
2023 | | Year Ended
December 31, |
| | 2022 | | 2021 |
| Sustaining capital investments | $ | 1,550 | | | $ | 1,340 | | | $ | 1,105 | |
| Growth capital investments: | | | | | |
| Low-carbon growth capital investments | 130 | | | 422 | | | 538 | |
| Other growth capital investments | 200 | | | 497 | | | 190 | |
| Total growth capital investments | 330 | | | 919 | | | 728 | |
| Capital investments attributable to Valero | $ | 1,880 | | | $ | 2,259 | | | $ | 1,833 | |
We have publicly announced GHG emissions reduction/displacement targets for 2025 and 2035. We believe that our expected allocation of growth capital into low-carbon projects is consistent with such targets. Certain of these low-carbon projects have been completed or are already in execution and the associated capital investments are included in our expected capital investments for 2023. Our capital investments in future years to achieve these targets are expected to include investments associated with certain low-carbon projects currently at various stages of progress, evaluation, or approval. See “ITEMS 1. and 2. BUSINESS AND PROPERTIES—OUR COMPREHENSIVE LIQUID FUELS STRATEGY—Our Low-Carbon Projects” for a description of our low-carbon projects.
Capital Investments Attributable to Valero
Capital investments attributable to Valero is a non-GAAP financial measure that reflects our net share of capital investments and is defined as all capital expenditures, deferred turnaround and catalyst cost expenditures, and investments in nonconsolidated joint ventures, excluding the portion of DGD’s capital investments attributable to the other joint venture member and all of the capital expenditures of other consolidated VIEs.
We are a 50 percent joint venture member in DGD and consolidate its financial statements. As a result, all of DGD’s net cash provided by operating activities (or operating cash flow) is included in our consolidated net cash provided by operating activities. DGD’s members use DGD’s operating cash flow (excluding changes in its current assets and current liabilities) to fund its capital investments rather than distribute all of that cash to themselves. Because DGD’s operating cash flow is effectively attributable to each member, only 50 percent of DGD’s capital investments should be attributed to our net share of capital investments. We also exclude all of the capital expenditures of other VIEs that we consolidate because we do not operate those VIEs. See Note 11 of Notes to Consolidated Financial Statements for more information about the VIEs that we consolidate. We believe capital investments attributable to Valero is an important measure because it more accurately reflects our capital investments.
Capital investments attributable to Valero should not be considered as an alternative to capital investments, which is the most comparable GAAP measure, nor should it be considered in isolation or as a substitute for an analysis of our cash flows as reported under GAAP. In addition, this non-GAAP measure may not be comparable to similarly titled measures used by other companies because we may define it differently, which may diminish its utility.
| | | | | | | | | | | | | | |
| Year Ended December 31, | |
| 2022 | | 2021 | | | |
Reconciliation of capital investments to capital investments attributable to Valero | | | | | | |
| Capital expenditures (excluding VIEs) | $ | 788 | | | $ | 513 | | | | |
| Capital expenditures of VIEs: | | | | | | |
| DGD | 853 | | | 1,042 | | | | |
| Other VIEs | 40 | | | 110 | | | | |
Deferred turnaround and catalyst cost expenditures (excluding VIEs) | 1,030 | | | 787 | | | | |
Deferred turnaround and catalyst cost expenditures of DGD | 26 | | | 6 | | | | |
| Investments in nonconsolidated joint ventures | 1 | | | 9 | | | | |
| Capital investments | 2,738 | | | 2,467 | | | | |
| Adjustments: | | | | | | |
DGD’s capital investments attributable to our joint venture member | (439) | | | (524) | | | | |
| Capital expenditures of other VIEs | (40) | | | (110) | | | | |
| Capital investments attributable to Valero | $ | 2,259 | | | $ | 1,833 | | | | |
Contractual Obligations
Below is a summary of our contractual obligations (in millions) as of December 31, 2022 that are expected to be paid within the next year and thereafter. These obligations are reflected in our balance sheets, except (i) the interest payments related to debt obligations, operating lease liabilities, and finance lease obligations and (ii) purchase obligations.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Payments Due by Period | | |
| Short-Term | | Long-Term | | | | | | | | | | Total |
| Debt obligations (a) | $ | 861 | | | $ | 8,464 | | | | | | | | | | | $ | 9,325 | |
| Interest payments related to debt obligations (b) | 466 | | | 5,419 | | | | | | | | | | | 5,885 | |
| Operating lease liabilities (c) | 345 | | | 1,043 | | | | | | | | | | | 1,388 | |
| Finance lease obligations (c) | 350 | | | 3,112 | | | | | | | | | | | 3,462 | |
| Other long-term liabilities (d) | — | | | 1,534 | | | | | | | | | | | 1,534 | |
| Purchase obligations (e) | 20,753 | | | 12,990 | | | | | | | | | | | 33,743 | |
| | | | | | | | | | | | | |
________________________
(a)Debt obligations are described in Note 8 of Notes to Consolidated Financial Statements, which is incorporated by reference into this item and includes a maturity analysis of our debt. Debt obligations exclude amounts related to net unamortized debt issuance costs and other.
(b)Interest payments related to debt obligations are the expected payments based on information available as of December 31, 2022.
(c)Operating lease liabilities and finance lease obligations are described in Note 4 of Notes to Consolidated Financial Statements, which is incorporated by reference into this item and includes maturity analyses of remaining minimum lease payments. Operating lease liabilities and finance lease obligations reflected in this table include related interest expense.
(d)Other long-term liabilities are described in Note 7 of Notes to Consolidated Financial Statements, which is incorporated by reference into this item. Other long-term liabilities exclude amounts related to the long-term portion of operating lease liabilities that are separately presented above.
(e)Purchase obligations are described in Note 9 of Notes to Consolidated Financial Statements, which is incorporated by reference into this item. Purchase obligations are based on (i) fixed or minimum quantities to be purchased and (ii) fixed or estimated prices to be paid based on current market conditions.
The amount outstanding associated with the IEnova Revolver, as defined and described in Note 8 of Notes to Consolidated Financial Statements, is reflected in current portion of debt and finance lease obligations in our balance sheet as of December 31, 2022, and also included in the table above in debt obligations – short-term. The IEnova Revolver is subject to repayment on demand; however, we do not expect the lender to demand repayment during the next 12 months. Thus, the final cash flows for this instrument cannot be predicted with certainty at this time.
We raised $4.0 billion of incremental debt in 2020 due to the negative impacts of the COVID-19 pandemic on our business. The debt reduction and refinancing transactions completed in the second half of 2021 and during the year ended December 31, 2022, have collectively reduced our debt by over $4.0 billion. We will continue to evaluate further deleveraging opportunities.
We have not entered into any transactions, agreements, or other contractual arrangements that would result in off-balance sheet liabilities.
Other Matters Impacting Liquidity and Capital Resources
Stock Purchase Program
During the year ended December 31, 2022, we purchased for treasury 37,999,481 of our shares for $4.6 billion. As of December 31, 2022, we had $2.3 billion remaining available for purchase under the October 2022 Program. We will continue to evaluate the timing of purchases when appropriate. We have no obligation to make purchases under this program. On February 23, 2023, our Board authorized our purchase of up to an additional $2.5 billion of our outstanding common stock with no expiration date, which is in addition to the amount remaining under the October 2022 Program.
Pension Plan Funding
We plan to contribute $108 million to our pension plans and $21 million to our other postretirement benefit plans during 2023. See Note 12 of Notes to Consolidated Financial Statements for a discussion of our employee benefit plans.
Tax Matters
The IRA includes various tax provisions, such as a 15 percent corporate alternative minimum tax, a one percent excise tax on purchases of our common stock by us, and expanded tax credits for low-carbon projects that may affect us. These provisions are effective for tax years beginning after December 31, 2022.
Cash Held by Our Foreign Subsidiaries
As of December 31, 2022, $4.1 billion of our cash and cash equivalents was held by our foreign subsidiaries. Cash held by our foreign subsidiaries can be repatriated to us through dividends without any U.S. federal income tax consequences, but certain other taxes may apply, including, but not limited to, withholding taxes imposed by certain foreign jurisdictions, U.S. state income taxes, and U.S. federal income tax on foreign exchange gains. Therefore, there is a cost to repatriate cash held by certain of our foreign subsidiaries to us. As of December 31, 2022, we recognized a deferred income tax liability of $51 million for foreign tax withholding on the anticipated repatriation of approximately $1 billion of cash held by one of our foreign subsidiaries.
Environmental Matters
Our operations are subject to extensive environmental regulations by government authorities relating to the discharge of materials into the environment, waste management, pollution prevention measures, GHG emissions, and characteristics and composition of many of our products. Because environmental laws and regulations are becoming more complex and stringent and new environmental laws and regulations are continuously being enacted or proposed, the level of future expenditures required for environmental matters could increase. See Note 7 of Notes to Consolidated Financial Statements for disclosure of our environmental liabilities.
Concentration of Customers
Our operations have a concentration of customers in the refining industry and customers who are refined petroleum product wholesalers and retailers. These concentrations of customers may impact our overall exposure to credit risk, either positively or negatively, in that these customers may be similarly affected by changes in economic or other conditions, including the uncertainties concerning the COVID-19 pandemic and other worldwide events causing volatility in the global crude oil markets. However, we believe that our portfolio of accounts receivable is sufficiently diversified to the extent necessary to minimize potential credit risk. Historically, we have not had any significant problems collecting our accounts receivable. See also “ITEM 1A. RISK FACTORS—Legal, Government, and Regulatory Risks—Legal, political, and regulatory developments regarding climate, GHG emissions, or the environment could adversely affect our business, financial condition, results of operations, and liquidity.”
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The following summary provides further information about our critical accounting policies that involve critical accounting estimates, and should be read 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. Unless otherwise noted, estimates of the sensitivity to earnings that would result from changes in the assumptions used in determining our estimates is not practicable due to the number of assumptions and contingencies involved, and the wide range of possible outcomes.
Unrecognized Tax Benefits
We take tax positions in our tax returns from time to time that ultimately may not be allowed by the relevant taxing authorities. When we take such positions, we evaluate the likelihood of sustaining those positions and determine the amount of tax benefit arising from such positions, if any, that should be recognized in our financial statements. Tax benefits not recognized by us are recorded as a liability for unrecognized tax benefits, which represents our potential future obligation to various taxing authorities if the tax positions are not sustained.
The evaluation of tax positions and the determination of the benefit arising from such positions that are recognized in our financial statements requires us to make significant judgments and estimates based on an analysis of complex tax laws and regulations and related interpretations. These judgments and estimates are subject to change due to many factors, including the progress of ongoing tax audits, case law, and changes in legislation.
Details of our liability for unrecognized tax benefits, along with other information about our unrecognized tax benefits, are included in Note 14 of Notes to Consolidated Financial Statements.
Impairment of Long-Lived Assets
Long-lived assets (primarily property, plant, and equipment) are tested for recoverability whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. A long-lived asset is not recoverable if its carrying amount exceeds the sum of the undiscounted cash flows expected to result from its use and eventual disposition. If a long-lived asset is not recoverable, an impairment loss is recognized for the amount by which the carrying amount of the long-lived asset exceeds its fair value, with fair value determined based on discounted estimated net cash flows or other appropriate methods.
In order to test for recoverability, we must make estimates of projected cash flows related to the asset being evaluated. Such estimates include, but are not limited to, assumptions about future sales volumes, commodity prices, operating costs, margins, the use or disposition of the asset, the asset’s estimated remaining useful life, and future expenditures necessary to maintain the asset’s existing service potential in light of existing and expected regulations. Due to the significant subjectivity of the assumptions used to test for recoverability, changes in market conditions could result in significant impairment charges in the future, thus affecting our earnings.
As of December 31, 2022, we determined that our Lakota ethanol plant was impaired, which resulted in an asset impairment loss of $61 million, as described in Note 5 of Notes to Consolidated Financial Statements.
New environmental and tax laws and regulations, as well as changes to existing laws and regulations, are continuously being enacted or proposed. The implementation of future legislative and regulatory initiatives (such as those discussed in ITEM 1A. RISK FACTORS) that may adversely affect our operations could indicate that the carrying value of an asset may not be recoverable and result in an impairment loss that could be material. If the circumstances that trigger an impairment also result in a reduction in the estimated useful life of the asset, then we may also be required to recognize an asset retirement obligation for that asset.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate “internal control over financial reporting” (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) for Valero Energy Corporation. Our management evaluated the effectiveness of Valero’s internal control over financial reporting as of December 31, 2022. In its evaluation, management used the criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management believes that as of December 31, 2022, our internal control over financial reporting was effective based on those criteria.
Our independent registered public accounting firm has issued an attestation report on the effectiveness of our internal control over financial reporting, which begins on page 69 of this report.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Valero Energy Corporation:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Valero Energy Corporation and subsidiaries (the Company) as of December 31, 2022 and 2021, 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, 2022, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2022, 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, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 23, 2023 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and 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 to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, 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 included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated
financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Assessment of gross unrecognized tax benefits
As discussed in Note 14 to the consolidated financial statements, as of December 31, 2022, the Company has gross unrecognized tax benefits, excluding related interest and penalties, of $284 million. The Company’s tax positions are subject to examination by local taxing authorities and the resolution of such examinations may span multiple years. Due to the complexities inherent in the interpretation of income tax laws in domestic and foreign jurisdictions, it is uncertain whether some of the Company’s income tax positions will be sustained upon examination.
We identified the assessment of the Company’s gross unrecognized tax benefits as a critical audit matter. Complex auditor judgment was required in evaluating the Company’s interpretation of income tax laws and assessing the Company’s estimate of the ultimate resolution of its income tax positions.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s income tax process. This included controls to evaluate which of the Company’s income tax positions may not be sustained upon examination and estimate the gross unrecognized tax benefits. We involved domestic and international income tax professionals with specialized skills and knowledge, who assisted in:
•obtaining an understanding and evaluating the Company’s income tax positions as filed or intended to be filed
•evaluating the Company’s interpretation of income tax laws by developing an independent assessment of the Company’s income tax positions and comparing the results to the Company’s assessment
•inspecting settlements and communications with applicable taxing authorities
•assessing the expiration of applicable statutes of limitations.
In addition, we evaluated the Company’s ability to estimate its gross unrecognized tax benefits by comparing historical uncertain income tax positions, including the gross unrecognized tax benefits, to actual results upon conclusion of tax examinations.
/s/ KPMG LLP
We have served as the Company’s auditor since 2004.
San Antonio, Texas
February 23, 2023
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Valero Energy Corporation:
Opinion on Internal Control Over Financial Reporting
We have audited Valero Energy Corporation and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee 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, 2022 and 2021, 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, 2022, and the related notes (collectively, the consolidated financial statements), and our report dated February 23, 2023 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission 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 to obtain 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 control based 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 Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
San Antonio, Texas
February 23, 2023
VALERO ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(millions of dollars, except par value)
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 4,862 | | | $ | 4,122 | |
| Receivables, net | 11,919 | | | 10,378 | |
| Inventories | 6,752 | | | 6,265 | |
| Prepaid expenses and other | 600 | | | 400 | |
| Total current assets | 24,133 | | | 21,165 | |
| Property, plant, and equipment, at cost | 50,576 | | | 49,072 | |
| Accumulated depreciation | (19,598) | | | (18,225) | |
| Property, plant, and equipment, net | 30,978 | | | 30,847 | |
| Deferred charges and other assets, net | 5,871 | | | 5,876 | |
| Total assets | $ | 60,982 | | | $ | 57,888 | |
| LIABILITIES AND EQUITY | | | |
| Current liabilities: | | | |
| Current portion of debt and finance lease obligations | $ | 1,109 | | | $ | 1,264 | |
| Accounts payable | 12,728 | | | 12,495 | |
| Accrued expenses | 1,215 | | | 1,253 | |
| Taxes other than income taxes payable | 1,568 | | | 1,461 | |
| Income taxes payable | 841 | | | 378 | |
| Total current liabilities | 17,461 | | | 16,851 | |
| Debt and finance lease obligations, less current portion | 10,526 | | | 12,606 | |
| Deferred income tax liabilities | 5,217 | | | 5,210 | |
| Other long-term liabilities | 2,310 | | | 3,404 | |
| Commitments and contingencies | | | |
| Equity: | | | |
| Valero Energy Corporation stockholders’ equity: | | | |
Common stock, $0.01 par value; 1,200,000,000 shares authorized; 673,501,593 and 673,501,593 shares issued | 7 | | | 7 | |
| Additional paid-in capital | 6,863 | | | 6,827 | |
Treasury stock, at cost; 301,372,958 and 264,305,955 common shares | (20,197) | | | (15,677) | |
| Retained earnings | 38,247 | | | 28,281 | |
| Accumulated other comprehensive loss | (1,359) | | | (1,008) | |
| Total Valero Energy Corporation stockholders’ equity | 23,561 | | | 18,430 | |
| Noncontrolling interests | 1,907 | | | 1,387 | |
| Total equity | 25,468 | | | 19,817 | |
| Total liabilities and equity | $ | 60,982 | | | $ | 57,888 | |
See Notes to Consolidated Financial Statements.
VALERO ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(millions of dollars, except per share amounts) | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | |
| 2022 | | 2021 | | 2020 | |
| Revenues (a) | $ | 176,383 | | | $ | 113,977 | | | $ | 64,912 | | |
| Cost of sales: | | | | | | |
| Cost of materials and other | 150,770 | | | 102,714 | | | 58,933 | | |
| Lower of cost or market (LCM) inventory valuation adjustment | — | | | — | | | (19) | | |
Operating expenses (excluding depreciation and amortization expense reflected below) | 6,389 | | | 5,776 | | | 4,435 | | |
| Depreciation and amortization expense | 2,428 | | | 2,358 | | | 2,303 | | |
| Total cost of sales | 159,587 | | | 110,848 | | | 65,652 | | |
| Asset impairment loss | 61 | | | — | | | — | | |
| Other operating expenses | 66 | | | 87 | | | 35 | | |
General and administrative expenses (excluding depreciation and amortization expense reflected below) | 934 | | | 865 | | | 756 | | |
| Depreciation and amortization expense | 45 | | | 47 | | | 48 | | |
| | | | | | |
| Operating income (loss) | 15,690 | | | 2,130 | | | (1,579) | | |
| Other income, net | 179 | | | 16 | | | 132 | | |
| Interest and debt expense, net of capitalized interest | (562) | | | (603) | | | (563) | | |
| Income (loss) before income tax expense (benefit) | 15,307 | | | 1,543 | | | (2,010) | | |
| Income tax expense (benefit) | 3,428 | | | 255 | | | (903) | | |
| | | | | | |
| | | | | | |
| Net income (loss) | 11,879 | | | 1,288 | | | (1,107) | | |
| Less: Net income attributable to noncontrolling interests | 351 | | | 358 | | | 314 | | |
Net income (loss) attributable to Valero Energy Corporation stockholders | $ | 11,528 | | | $ | 930 | | | $ | (1,421) | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Earnings (loss) per common share | $ | 29.05 | | | $ | 2.27 | | | $ | (3.50) | | |
| Weighted-average common shares outstanding (in millions) | 395 | | | 407 | | | 407 | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Earnings (loss) per common share – assuming dilution | $ | 29.04 | | | $ | 2.27 | | | $ | (3.50) | | |
Weighted-average common shares outstanding – assuming dilution (in millions) | 396 | | | 407 | | | 407 | | |
__________________________ | | | | | | |
| Supplemental information: | | | | | | |
(a) Includes excise taxes on sales by certain of our foreign operations | $ | 5,194 | | | $ | 5,645 | | | $ | 4,797 | | |
See Notes to Consolidated Financial Statements.
VALERO ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(millions of dollars)
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Net income (loss) | $ | 11,879 | | | $ | 1,288 | | | $ | (1,107) | |
| Other comprehensive income (loss): | | | | | |
| Foreign currency translation adjustment | (613) | | | (47) | | | 161 | |
Net gain (loss) on pension and other postretirement benefits | 335 | | | 378 | | | (80) | |
| Net gain (loss) on cash flow hedges | (6) | | | (2) | | | 2 | |
| | | | | |
Other comprehensive income (loss) before income tax expense (benefit) | (284) | | | 329 | | | 83 | |
Income tax expense (benefit) related to items of other comprehensive income (loss) | 70 | | | 82 | | | (16) | |
| Other comprehensive income (loss) | (354) | | | 247 | | | 99 | |
| Comprehensive income (loss) | 11,525 | | | 1,535 | | | (1,008) | |
Less: Comprehensive income attributable to noncontrolling interests | 348 | | | 359 | | | 316 | |
Comprehensive income (loss) attributable to Valero Energy Corporation stockholders | $ | 11,177 | | | $ | 1,176 | | | $ | (1,324) | |
See Notes to Consolidated Financial Statements.
VALERO ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY
(millions of dollars)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Valero Energy Corporation Stockholders’ Equity | | | | |
| Common
Stock | | Additional
Paid-in
Capital | | Treasury
Stock | | Retained
Earnings | | Accumulated
Other
Comprehensive
Loss | | Total | | Non-
controlling
Interests | | Total
Equity |
| Balance as of December 31, 2019 | $ | 7 | | | $ | 6,821 | | | $ | (15,648) | | | $ | 31,974 | | | $ | (1,351) | | | $ | 21,803 | | | $ | 733 | | | $ | 22,536 | |
| Net income (loss) | — | | | — | | | — | | | (1,421) | | | — | | | (1,421) | | | 314 | | | (1,107) | |
Dividends on common stock ($3.92 per share) | — | | | — | | | — | | | (1,600) | | | — | | | (1,600) | | | — | | | (1,600) | |
| Stock-based compensation expense | — | | | 76 | | | — | | | — | | | — | | | 76 | | | — | | | 76 | |
Transactions in connection with stock-based compensation plans | — | | | (83) | | | 85 | | | — | | | — | | | 2 | | | — | | | 2 | |
| Purchases of common stock for treasury | — | | | — | | | (156) | | | — | | | — | | | (156) | | | — | | | (156) | |
| | | | | | | | | | | | | | | |
| Distributions to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | (208) | | | (208) | |
| | | | | | | | | | | | | | | |
| Other comprehensive income | — | | | — | | | — | | | — | | | 97 | | | 97 | | | 2 | | | 99 | |
| Balance as of December 31, 2020 | 7 | | | 6,814 | | | (15,719) | | | 28,953 | | | (1,254) | | | 18,801 | | | 841 | | | 19,642 | |
| Net income | — | | | — | | | — | | | 930 | | | — | | | 930 | | | 358 | | | 1,288 | |
Dividends on common stock ($3.92 per share) | — | | | — | | | — | | | (1,602) | | | — | | | (1,602) | | | — | | | (1,602) | |
| Stock-based compensation expense | — | | | 80 | | | — | | | — | | | — | | | 80 | | | — | | | 80 | |
Transactions in connection with stock-based compensation plans | — | | | (67) | | | 69 | | | — | | | — | | | 2 | | | — | | | 2 | |
| Purchases of common stock for treasury | — | | | — | | | (27) | | | — | | | — | | | (27) | | | — | | | (27) | |
| Contributions from noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | 189 | | | 189 | |
| Distributions to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | (2) | | | (2) | |
| | | | | | | | | | | | | | | |
| Other comprehensive income | — | | | — | | | — | | | — | | | 246 | | | 246 | | | 1 | | | 247 | |
| Balance as of December 31, 2021 | 7 | | | 6,827 | | | (15,677) | | | 28,281 | | | (1,008) | | | 18,430 | | | 1,387 | | | 19,817 | |
| Net income | — | | | — | | | — | | | 11,528 | | | — | | | 11,528 | | | 351 | | | 11,879 | |
Dividends on common stock ($3.92 per share) | — | | | — | | | — | | | (1,562) | | | — | | | (1,562) | | | — | | | (1,562) | |
| Stock-based compensation expense | — | | | 89 | | | — | | | — | | | — | | | 89 | | | — | | | 89 | |
Transactions in connection with stock-based compensation plans | — | | | (53) | | | 57 | | | — | | | — | | | 4 | | | — | | | 4 | |
| Purchases of common stock for treasury | — | | | — | | | (4,577) | | | — | | | — | | | (4,577) | | | — | | | (4,577) | |
| Contributions from noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | 265 | | | 265 | |
| Distributions to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | (93) | | | (93) | |
| | | | | | | | | | | | | | | |
| Other comprehensive loss | — | | | — | | | — | | | — | | | (351) | | | (351) | | | (3) | | | (354) | |
| Balance as of December 31, 2022 | $ | 7 | | | $ | 6,863 | | | $ | (20,197) | | | $ | 38,247 | | | $ | (1,359) | | | $ | 23,561 | | | $ | 1,907 | | | $ | 25,468 | |
See Notes to Consolidated Financial Statements.
VALERO ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(millions of dollars)
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Cash flows from operating activities: | | | | | |
| Net income (loss) | $ | 11,879 | | | $ | 1,288 | | | $ | (1,107) | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | |
| Depreciation and amortization expense | 2,473 | | | 2,405 | | | 2,351 | |
| Loss (gain) on early redemption and retirement of debt, net | (14) | | | 193 | | | — | |
| LCM inventory valuation adjustment | — | | | — | | | (19) | |
| Asset impairment loss | 61 | | | — | | | — | |
| Gain on sale of assets | — | | | (62) | | | — | |
| Deferred income tax expense (benefit) | 50 | | | (126) | | | 158 | |
| Changes in current assets and current liabilities | (1,626) | | | 2,225 | | | (345) | |
| Changes in deferred charges and credits and other operating activities, net | (249) | | | (64) | | | (90) | |
| Net cash provided by operating activities | 12,574 | | | 5,859 | | | 948 | |
| Cash flows from investing activities: | | | | | |
| Capital expenditures (excluding variable interest entities (VIEs)) | (788) | | | (513) | | | (1,014) | |
| Capital expenditures of VIEs: | | | | | |
| Diamond Green Diesel Holdings LLC (DGD) | (853) | | | (1,042) | | | (523) | |
| Other VIEs | (40) | | | (110) | | | (251) | |
| Deferred turnaround and catalyst cost expenditures (excluding VIEs) | (1,030) | | | (787) | | | (623) | |
| Deferred turnaround and catalyst cost expenditures of DGD | (26) | | | (6) | | | (25) | |
| Proceeds from sale of assets | 32 | | | 270 | | | — | |
| Investments in nonconsolidated joint ventures | (1) | | | (9) | | | (54) | |
| | | | | |
| | | | | |
| | | | | |
| Other investing activities, net | (99) | | | 38 | | | 65 | |
| Net cash used in investing activities | (2,805) | | | (2,159) | | | (2,425) | |
| Cash flows from financing activities: | | | | | |
| Proceeds from debt issuances and borrowings (excluding VIEs) | 2,239 | | | 1,446 | | | 4,320 | |
| Proceeds from borrowings of VIEs: | | | | | |
| DGD | 809 | | | 301 | | | — | |
| Other VIEs | 105 | | | 81 | | | 250 | |
| Repayments of debt and finance lease obligations (excluding VIEs) | (5,067) | | | (2,849) | | | (490) | |
| Repayments of debt and finance lease obligations of VIEs: | | | | | |
| DGD | (823) | | | (180) | | | — | |
| Other VIEs | (73) | | | (6) | | | (5) | |
| Premiums paid on early redemption and retirement of debt | (56) | | | (179) | | | — | |
| Purchases of common stock for treasury | (4,577) | | | (27) | | | (156) | |
| Common stock dividend payments | (1,562) | | | (1,602) | | | (1,600) | |
| Contributions from noncontrolling interests | 265 | | | 189 | | | — | |
| Distributions to noncontrolling interests | (93) | | | (2) | | | (208) | |
| Other financing activities, net | (16) | | | (18) | | | (34) | |
| Net cash provided by (used in) financing activities | (8,849) | | | (2,846) | | | 2,077 | |
| Effect of foreign exchange rate changes on cash | (180) | | | (45) | | | 130 | |
| Net increase in cash and cash equivalents | 740 | | | 809 | | | 730 | |
| Cash and cash equivalents at beginning of year | 4,122 | | | 3,313 | | | 2,583 | |
| Cash and cash equivalents at end of year | $ | 4,862 | | | $ | 4,122 | | | $ | 3,313 | |
See Notes to Consolidated Financial Statements.
VALERO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION, AND SIGNIFICANT ACCOUNTING POLICIES
Description of Business
The terms “Valero,” “we,” “our,” and “us,” as used in this report, may refer to Valero Energy Corporation, one or more of its consolidated subsidiaries, or all of them taken as a whole. The term “DGD,” as used in this report, may refer to Diamond Green Diesel Holdings LLC, its wholly owned consolidated subsidiary, or both of them taken as a whole.
We are a multinational manufacturer and marketer of petroleum-based and low-carbon liquid transportation fuels and petrochemical products, and we sell our products primarily in the United States (U.S.), Canada, the United Kingdom (U.K.), Ireland, and Latin America. We own 15 petroleum refineries located in the U.S., Canada, and the U.K. with a combined throughput capacity of approximately 3.2 million barrels per day. We are a joint venture member in DGD, which owns two renewable diesel plants located in the Gulf Coast region of the U.S. with a combined production capacity of approximately 1.2 billion gallons per year, and we own 12 ethanol plants located in the Mid-Continent region of the U.S. with a combined production capacity of approximately 1.6 billion gallons per year.
Basis of Presentation
General
These consolidated financial statements were prepared in conformity with U.S. generally accepted accounting principles (GAAP) and with the rules and regulations of the U.S. Securities and Exchange Commission (SEC).
Significant Accounting Policies
Principles of Consolidation
These financial statements include those of Valero, our wholly owned subsidiaries, and VIEs in which we have a controlling financial interest. The VIEs that we consolidate are described in Note 11. The ownership interests held by others in the VIEs are recorded as noncontrolling interests. Intercompany items and transactions have been eliminated in consolidation. Investments in less than wholly owned entities where we have significant influence are accounted for using the equity method.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. On an ongoing basis, we review our estimates based on currently available information. Changes in facts and circumstances may result in revised estimates.
Cash Equivalents
Our cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and have a maturity of three months or less when acquired.
Investments in Debt Securities
Investments in debt securities that have stated maturities of three months or less from the date of acquisition are classified as cash equivalents, and those with stated maturities of greater than three months
VALERO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
but less than one year are classified as short-term investments, which are reflected in prepaid expenses and other on our balance sheet. Our investments in debt securities are classified as available-for-sale (AFS) and are subsequently measured and carried at fair value on our balance sheet with changes in fair value reported in other comprehensive income until realized. The cost of a security sold is determined using the first-in, first-out method.
Receivables
Trade receivables are carried at amortized cost, which is the original invoice amount adjusted for cash collections, write-offs, and foreign exchange. We maintain an allowance for credit losses, which is adjusted based on management’s assessment of our customers’ historical collection experience, known or expected credit risks, and industry and economic conditions.
Inventories
The cost of (i) refinery feedstocks and refined petroleum products and blendstocks, (ii) renewable diesel feedstocks (i.e., waste and renewable feedstocks, predominately animal fats, used cooking oils, and inedible distillers corn oil) and products, and (iii) ethanol feedstocks and products 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 and supplies are determined principally under the weighted-average cost method. Our non-LIFO inventories are carried at the lower of cost or net realizable value.
In determining the market value of our inventories, we assume that feedstocks are converted into products, which requires us to make estimates regarding the products expected to be produced from those feedstocks and the conversion costs required to convert those feedstocks into products. We also estimate the usual and customary transportation costs required to move the inventory from our plants to the appropriate points of sale. We then apply an estimated selling price to our inventories. If the aggregate market value of our LIFO inventories or the aggregate net realizable value of our non-LIFO inventories is less than the related aggregate cost, we recognize a loss for the difference in our statements of income. To the extent the aggregate market value of our LIFO inventories subsequently increases, we recognize an increase to the value of our inventories (not to exceed cost) and a gain in our statements of income.
Property, Plant, and Equipment
The cost of property, plant, and equipment (property assets) purchased or constructed, including betterments of property assets, is capitalized. However, the cost of repairs to and normal maintenance of property assets is expensed as incurred. Betterments of property assets are those that extend the useful life, increase the capacity or improve the operating efficiency of the asset, or improve the safety of our operations. The cost of property assets constructed includes interest and certain overhead costs allocable to the construction activities.
Our operations are highly capital intensive. Each of our refineries and plants comprises a large base of property assets, consisting of a series of interconnected, highly integrated and interdependent crude oil and other feedstock processing facilities and supporting infrastructure (Units) and other property assets that support our business. Improvements consist of the addition of new Units and other property assets and betterments of those Units and assets. We plan for these improvements by developing a multi-year capital investment program that is updated and revised based on changing internal and external factors.
VALERO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Depreciation of crude oil processing and waste and renewable feedstocks processing facilities is recorded on a straight-line basis over the estimated useful lives of these assets primarily using the composite method of depreciation. We maintain a separate composite group of property assets for each of our refineries and our renewable diesel plants. We estimate the useful life of each group based on an evaluation of the property assets comprising the group, and such evaluations consist of, but are not limited to, the physical inspection of the assets to 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 composite groups range primarily from 20 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 is depreciated over that group’s estimated useful life. We design improvements to our crude oil processing and waste and renewable feedstocks processing facilities in accordance with engineering specifications, design standards, and practices we believe to be accepted in our industry, and these improvements have design lives consistent with our estimated useful lives. Therefore, we believe the use of the group life to depreciate the cost of improvements made to the group is reasonable 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 or replaced is charged to accumulated depreciation and no gain or loss is recognized. However, a gain or loss is recognized for a major property asset that is retired, replaced, sold, or for an abnormal disposition of a property asset (primarily involuntary conversions). Gains and losses are reflected in depreciation and amortization expense, unless such amounts are reported separately due to materiality.
Depreciation of our corn processing facilities, administrative buildings, and other assets is recorded on a straight-line basis over the estimated useful lives of the related assets using the component method of deprecation. The estimated useful life of our corn processing facilities is 20 years.
Leasehold improvements are amortized on a straight-line basis over the shorter of the lease term or the estimated useful life of the related asset. Finance lease right-of-use assets are amortized as discussed below under “Leases.”
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, renewable diesel plants, and ethanol plants, are deferred when incurred and amortized on a straight-line basis over the period of time estimated to lapse until 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 catalyst has deteriorated beyond its prescribed function, are deferred when incurred and amortized on a straight-line basis over the estimated useful life of the specific catalyst;
VALERO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
•operating lease right-of-use assets, which are amortized as discussed below under “Leases”;
•investments in nonconsolidated joint ventures;
•purchased compliance credits, which are described below under “Costs of Renewable and Low-Carbon Fuel Programs”;
•goodwill;
•intangible assets, which are amortized over their estimated useful lives; and
•noncurrent income taxes receivable.
Leases
We evaluate if a contract is or contains a lease at inception of the contract. If we determine that a contract is or contains a lease, we recognize a right-of-use (ROU) asset and lease liability at the commencement date of the lease based on the present value of lease payments over the lease term. The present value of the lease payments is determined by using the implicit rate when readily determinable. If not readily determinable, our centrally managed treasury group provides an incremental borrowing rate based on quoted interest rates obtained from financial institutions. The rate used is for a term similar to the duration of the lease based on information available at the commencement date. Lease terms include options to extend or terminate the lease when it is reasonably certain that we will exercise those options.
We recognize ROU assets and lease liabilities for leasing arrangements with terms greater than one year. Except for the marine transportation asset class, we account for lease and nonlease components in a contract as a single lease component for all classes of underlying assets. Our marine transportation contracts include nonlease components, such as maintenance and crew costs. We allocate the consideration in these contracts based on pricing information provided by the third-party broker.
Expense for an operating lease is recognized as a single lease cost on a straight-line basis over the lease term and is reflected in the appropriate income statement line item based on the leased asset’s function. Amortization expense of a finance lease ROU asset is recognized on a straight-line basis over the lesser of the useful life of the leased asset or the lease term. However, if the lessor transfers ownership of the finance lease ROU asset to us at the end of the lease term, the finance lease ROU asset is amortized over the useful life of the leased asset. Amortization expense is reflected in depreciation and amortization expense. Interest expense is incurred based on the carrying value of the lease liability and is reflected in “interest and debt expense, net of capitalized interest.”
Impairment of Assets
Long-lived assets are tested for recoverability whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. A long-lived asset is not deemed recoverable if its carrying amount exceeds the sum of the undiscounted cash flows expected to result from its use and eventual disposition. If a long-lived asset is not deemed recoverable, an impairment loss is recognized for the amount by which the carrying amount of the long-lived asset exceeds its fair value, with fair value determined based on discounted estimated net cash flows or other appropriate methods.
VALERO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We evaluate our equity method investments for impairment when there is evidence that we may not be able to recover the carrying amount of our investments or the investee is unable to sustain an earnings capacity that justifies the carrying amount. A loss in the value of an investment that is other than a temporary decline is recognized based on the difference between the estimated current fair value of the investment and its carrying amount.
Goodwill is not amortized, but is tested for impairment annually on October 1st and in interim periods when events or changes in circumstances indicate that the fair value of a reporting unit with goodwill is below its carrying amount. A goodwill impairment loss is recognized for the amount that the carrying amount of a reporting unit, including goodwill, exceeds its fair value, limited to the total amount of goodwill allocated to that reporting unit.
Asset Retirement Obligations
We 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 the liability when we have a legal obligation to incur costs to retire the asset and when a reasonable estimate of the fair value of the liability can be made. If a reasonable estimate cannot be made at the time the liability is incurred, we record the liability when sufficient information is available to estimate the liability’s fair value.
We have obligations with respect to certain of our assets at our refineries and plants to clean and/or dispose of various component parts of the assets at the time they are retired. However, these component parts can be used for extended and indeterminate periods of time as long as they are properly maintained and/or upgraded. It is our practice and current intent to maintain all our assets and continue making improvements to those assets based on technological advances. As a result, we believe that assets at our refineries and plants have indeterminate lives for purposes of estimating asset retirement obligations because dates or ranges of dates upon which we would retire such assets cannot reasonably be estimated at this time. We will recognize a liability at such time when sufficient information exists to estimate a date or range of potential settlement dates that is needed to employ a present value technique to estimate fair value.
Environmental Matters
Liabilities for future remediation costs are recorded when environmental assessments and/or remedial efforts are probable and the costs can be reasonably estimated. Other than for assessments, the timing and magnitude of these accruals generally are based on the completion of investigations or other studies or a commitment to a formal plan of action. Amounts recorded for environmental liabilities have not been reduced by possible recoveries from third parties and have not been measured on a discounted basis.
Legal Contingencies
We are subject to legal proceedings, claims, and liabilities that arise in the ordinary course of business. We accrue losses associated with legal claims when such losses are probable and reasonably estimable. If we determine that a loss is probable and cannot estimate a specific amount for that loss but can estimate a range of loss, the best estimate within the range is accrued. If no amount within the range is a better estimate than any other, the minimum amount of the range is accrued. Estimates are adjusted as additional
VALERO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
information becomes available or circumstances change. Legal defense costs associated with loss contingencies are expensed in the period incurred.
Foreign Currency Translation
Generally, our foreign subsidiaries use their local currency as their functional currency. Balance sheet amounts are translated into U.S. dollars using exchange rates in effect as of the balance sheet date. Income statement amounts are translated into U.S. dollars using the exchange rates in effect at the time the underlying transactions occur. Foreign currency translation adjustments are recorded as a component of accumulated other comprehensive loss.
Revenue Recognition
Our revenues are primarily generated from contracts with customers. We generate revenue from contracts with customers from the sale of products by our Refining, Renewable Diesel, and Ethanol segments. Revenues are recognized when we satisfy our performance obligation to transfer products to our customers, which typically occurs at a point in time upon shipment or delivery of the products, and for an amount that reflects the transaction price that is allocated to the performance obligation.
The customer is able to direct the use of, and obtain substantially all of the benefits from, the products at the point of shipment or delivery. As a result, we consider control to have transferred upon shipment or delivery because we have a present right to payment at that time, the customer has legal title to the asset, we have transferred physical possession of the asset, and the customer has significant risks and rewards of ownership of the asset.
Our contracts with customers state the final terms of the sale, including the description, quantity, and price for goods sold. Payment terms for our customers vary by type of customer and method of delivery; however, the payment is typically due in full within two to ten days from date of invoice. In the normal course of business, we generally do not accept product returns.
The transaction price is the consideration that we expect to be entitled to in exchange for our products. The transaction price for substantially all of our contracts is generally based on commodity market pricing (i.e., variable consideration). As such, this market pricing may be constrained (i.e., not estimable) at the inception of the contract but will be recognized based on the applicable market pricing, which will be known upon transfer of the goods to the customer. Some of our contracts also contain variable consideration in the form of sales incentives to our customers, such as discounts and rebates. For contracts that include variable consideration, we estimate the factors that determine the variable consideration in order to establish the transaction price.
We have elected to exclude from the measurement of the transaction price all taxes assessed by government authorities that are both imposed 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 our foreign operations. The amount of such taxes is provided in supplemental information in a footnote to the statements of income.
VALERO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
There are instances where we provide shipping services in relation to the goods sold to our customer. Shipping and handling costs that occur before the customer obtains control of the goods are deemed to be fulfillment activities and are included in cost of materials and other. We have elected to account for shipping and handling activities that occur after the customer has obtained control of a good as fulfillment activities rather than as a promised service and we have included these activities in cost of materials and other.
We enter into certain purchase and sale arrangements with the same counterparty that are deemed to be made in contemplation of one another. We combine these transactions and present the net effect in cost of materials and other. We also enter into refined petroleum product exchange transactions to fulfill sales contracts with our customers by accessing refined petroleum products in markets where we do not operate our own refineries. These refined petroleum product exchanges are accounted for as exchanges of nonmonetary assets, 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, renewable diesel feedstocks and products, and ethanol feedstocks and products) that are a component of our products sold; (ii) costs related to the delivery (such as shipping and handling costs) of products sold; (iii) costs related to our obligations to comply with the Renewable and Low-Carbon Fuel Programs defined below under “Costs of Renewable and Low-Carbon Fuel Programs”; (iv) the blender’s tax credit recognized on qualified fuel mixtures; (v) gains and losses on our commodity derivative instruments; and (vi) certain excise taxes.
Operating expenses (excluding depreciation and amortization expense) include costs to operate our refineries (and associated logistics assets), renewable diesel plants, and ethanol plants. These costs primarily include employee-related expenses, energy and utility 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 a component of cost of sales and general and administrative expenses and is disclosed by reportable segment in Note 16.
Other operating expenses include costs, if any, incurred by our reportable segments that are not associated with our cost of sales.
Costs of Renewable and Low-Carbon Fuel Programs
We purchase credits to comply with various government and regulatory blending programs, such as the U.S. Environmental Protection Agency’s Renewable Fuel Standard, the California Low Carbon Fuel Standard, Canada Clean Fuel Regulations, and similar programs in other jurisdictions in which we operate (collectively, the Renewable and Low-Carbon Fuel Programs). We purchase compliance credits (primarily Renewable Identification Numbers (RINs)) to comply with government regulations that require us to blend a certain volume of renewable and low-carbon fuels into the petroleum-based transportation fuels we produce in, or import into, the respective jurisdiction to be consumed therein based on annual
VALERO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
quotas. To the degree that we are unable to blend renewable and low-carbon fuels at the required quotas, we must purchase compliance credits to meet our obligations.
The costs of purchased compliance credits are charged to cost of materials and other when such credits are needed to satisfy our compliance obligations. To the extent we have not purchased enough credits nor entered into fixed-price purchase contracts to satisfy our obligations as of the balance sheet date, we charge cost of materials and other for such deficiency based on the market prices of the credits as of the balance sheet date, and we record a liability for our obligation to purchase those credits. See Note 18 for disclosure of our fair value liability. If the number of purchased credits exceeds our obligation as of the balance sheet date, we record a prepaid asset equal to the amount paid for those excess credits.
Stock-Based Compensation
Compensation expense for our share-based compensation plans is based on the fair value of the awards granted and is recognized 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 to the date retirement eligibility is achieved if that date is expected to occur during the vesting period established in the award.
Income Taxes
Income taxes are accounted for under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred amounts are measured using enacted tax rates expected to apply to taxable income in the year those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by unrecognized tax benefits, if such items may be available to offset the unrecognized tax benefit. Income tax effects are released from accumulated other comprehensive loss to retained earnings, when applicable, on an individual item basis as those items are reclassified into income.
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 Share
Earnings per common share is computed by dividing net income attributable to Valero stockholders by the weighted-average number of common shares outstanding for the year. Participating securities are included in the computation of basic earnings per share using the two-class method. Earnings per common share – assuming dilution is computed by dividing net income attributable to Valero stockholders 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 of including such shares would be antidilutive.
Financial Instruments
Our financial instruments include cash and cash equivalents, investments in debt securities, receivables, payables, debt obligations, operating and finance lease obligations, commodity derivative contracts, and foreign currency derivative contracts. The estimated fair values of cash and cash equivalents, receivables,
VALERO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
payables, debt obligations, and operating and finance lease obligations approximate their carrying amounts, except for certain debt as disclosed in Note 18. Investments in debt securities, commodity derivative contracts, and foreign currency derivative contracts are recognized at their fair values.
Derivatives and Hedging
All derivative instruments, not designated as normal purchases or sales, are recognized in the balance sheet as either assets or liabilities measured at their fair values with changes in fair value recognized currently in income or in other comprehensive income as appropriate. To manage commodity price risk, we primarily use cash flow hedges and economic hedges, and we also use fair value hedges from time to time. The cash flow effects of all of our derivative instruments are reflected in operating activities in the consolidated statements of cash flows.
Accounting Pronouncement Adopted During 2022
Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2022-06—“Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848” was issued and adopted prospectively by us on December 21, 2022. Our adoption of this ASU did not have a material impact on our financial statements or related disclosures.
2. RECEIVABLES
Receivables consisted of the following (in millions):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Receivables from contracts with customers | $ | 7,189 | | | $ | 6,228 | |
| Receivables from certain purchase and sale arrangements | 3,602 | | | 3,768 | |
| Receivables before allowance for credit losses | 10,791 | | | 9,996 | |
| Allowance for credit losses | (30) | | | (28) | |
| Receivables after allowance for credit losses | 10,761 | | | 9,968 | |
| Income taxes receivable | 142 | | | 21 | |
| Other receivables | 1,016 | | | 389 | |
| Receivables, net | $ | 11,919 | | | $ | 10,378 | |
VALERO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. INVENTORIES
Inventories consisted of the following (in millions):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Refinery feedstocks | $ | 1,949 | | | $ | 1,995 | |
| Refined petroleum products and blendstocks | 3,579 | | | 3,567 | |
| Renewable diesel feedstocks and products | 583 | | | 135 | |
| Ethanol feedstocks and products | 328 | | | 273 | |
| Materials and supplies | 313 | | | 295 | |
| | | |
| | | |
| Inventories | $ | 6,752 | | | $ | 6,265 | |
As of December 31, 2022 and 2021, the replacement cost (market value) of LIFO inventories exceeded their LIFO carrying amounts by $6.3 billion and $5.2 billion, respectively. The market value of our LIFO inventories fell below their LIFO inventory carrying amounts as of March 31, 2020, and as a result, we recorded an LCM inventory valuation reserve of $2.5 billion in order to state our inventories at market. As of September 30, 2020, we reevaluated our inventories and determined that our cost was lower than market. As a result, our LCM inventory valuation reserve was fully reversed as of September 30, 2020. The change in our LCM inventory valuation reserve resulted in a net benefit of $19 million for the year ended December 31, 2020 due to the foreign currency translation effect of the portion of the LCM inventory valuation adjustment attributable to our foreign operations.
During the year ended December 31, 2022, we had a liquidation of certain LIFO inventory layers, which was due to weather-related production disruptions that occurred at the end of the year that decreased cost of materials and other by $323 million.
Our non-LIFO inventories accounted for $1.6 billion and $1.4 billion of our total inventories as of December 31, 2022 and 2021, respectively.
VALERO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. LEASES
General
We have entered into long-term leasing arrangements for the right to use various classes of underlying assets as follows:
•Pipelines, Terminals, and Tanks includes facilities and equipment used in the storage, transportation, production, and sale of refinery feedstock, refined petroleum product, ethanol, and corn inventories;
•Marine Transportation includes time charters for ocean-going tankers and coastal vessels;
•Rail Transportation includes railcars and related storage facilities; and
•Other includes machinery, equipment, and various facilities used in our refining, renewable diesel, and ethanol operations; facilities and equipment related to industrial gases and power used in our operations; land and rights-of-way associated with our refineries, plants, and pipelines and other logistics assets, as well as office facilities; and equipment primarily used at our corporate offices, such as printers and copiers.
In addition to fixed lease payments, some arrangements contain provisions for variable lease payments. Certain leases for pipelines, terminals, and tanks provide for variable lease payments based on, among other things, throughput volumes in excess of a base amount. Certain marine transportation leases contain provisions for payments that are contingent on usage. Additionally, if the rental increases are not scheduled in the lease, such as an increase based on subsequent changes in the index or rate, those rents are considered variable lease payments. In all instances, variable lease payments are recognized in the period in which the obligation for those payments is incurred.
VALERO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Lease Costs and Other Supplemental Information
Our total lease cost comprises costs that are included in our income statement, as well as costs capitalized as part of an item of property, plant, and equipment or inventory. Total lease cost was as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pipelines,
Terminals,
and Tanks | | Transportation | | Other | | Total |
| | Marine | | Rail | | |
| Year ended December 31, 2022 | | | | | | | | | |
| Finance lease cost: | | | | | | | | | |
| Amortization of ROU assets | $ | 183 | | | $ | — | | | $ | 3 | | | $ | 32 | | | $ | 218 | |
| Interest on lease liabilities | 78 | | | — | | | 1 | | | 5 | | | 84 | |
| Operating lease cost | 171 | | | 102 | | | 68 | | | 38 | | | 379 | |
| Variable lease cost | 79 | | | 50 | | | — | | | 9 | | | 138 | |
| Short-term lease cost | 15 | | | 82 | | | 3 | | | 57 | | | 157 | |
| Sublease income | — | | | (27) | | | — | | | (2) | | | (29) | |
| Total lease cost | $ | 526 | | | $ | 207 | | | $ | 75 | | | $ | 139 | | | $ | 947 | |
| | | | | | | | | |
| Year ended December 31, 2021 | | | | | | | | | |
| Finance lease cost: | | | | | | | | | |
| Amortization of ROU assets | $ | 137 | | | $ | — | | | $ | 2 | | | $ | 28 | | | $ | 167 | |
| Interest on lease liabilities | 66 | | | — | | | 1 | | | 5 | | | 72 | |
| Operating lease cost | 163 | | | 105 | | | 64 | | | 49 | | | 381 | |
| Variable lease cost | 51 | | | 21 | | | — | | | 7 | | | 79 | |
| Short-term lease cost | 5 | | | 44 | | | 1 | | | 46 | | | 96 | |
| Sublease income | — | | | (4) | | | — | | | (3) | | | (7) | |
| Total lease cost | $ | 422 | | | $ | 166 | | | $ | 68 | | | $ | 132 | | | $ | 788 | |
| | | | | | | | | |
| Year ended December 31, 2020 | | | | | | | | | |
| Finance lease cost: | | | | | | | | | |
| Amortization of ROU assets | $ | 109 | | | $ | — | | | $ | 2 | | | $ | 17 | | | $ | 128 | |
| Interest on lease liabilities | 92 | | | — | | | — | | | 6 | | | 98 | |
| Operating lease cost | 165 | | | 156 | | | 61 | | | 52 | | | 434 | |
| Variable lease cost | 53 | | | 40 | | | 1 | | | 5 | | | 99 | |
| Short-term lease cost | 9 | | | 45 | | | — | | | 37 | | | 91 | |
| Sublease income | — | | | (10) | | | — | | | (2) | | | (12) | |
| Total lease cost | $ | 428 | | | $ | 231 | | | $ | 64 | | | $ | 115 | | | $ | 838 | |
VALERO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents additional information related to our operating and finance leases (in millions, except for lease terms and discount rates):
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| Operating
Leases | | Finance
Leases | | Operating
Leases | | Finance
Leases |
| Supplemental balance sheet information | | | | | | | |
ROU assets, net reflected in the following balance sheet line items: | | | | | | | |
| Property, plant, and equipment, net | $ | — | | $ | 2,278 | | $ | — | | $ | 1,846 |
| Deferred charges and other assets, net | 1,114 | | — | | 1,284 | | — |
| Total ROU assets, net | $ | 1,114 | | $ | 2,278 | | $ | 1,284 | | $ | 1,846 |
| | | | | | | |
Current lease liabilities reflected in the following balance sheet line items: | | | | | | | |
Current portion of debt and finance lease obligations | $ | — | | $ | 248 | | $ | — | | $ | 154 |
| Accrued expenses | 311 | | — | | 315 | | — |
Noncurrent lease liabilities reflected in the following balance sheet line items: | | | | | | | |
Debt and finance lease obligations, less current portion | — | | 2,146 | | — | | 1,766 |
| Other long-term liabilities | 776 | | — | | 940 | | — |
| Total lease liabilities | $ | 1,087 | | $ | 2,394 | | $ | 1,255 | | $ | 1,920 |
| | | | | | | |
| Other supplemental information | | | | | | | |
| Weighted-average remaining lease term | 7.5 years | | 14.6 years | | 7.1 years | | 14.3 years |
| Weighted-average discount rate | 5.2 | % | | 4.6 | % | | 4.2 | % | | 4.0 | % |
Supplemental cash flow information related to our operating and finance leases is presented in Note 17.
DGD Port Arthur Plant Finance Lease
In connection with the construction of the DGD plant located next to our Port Arthur Refinery (the DGD Port Arthur Plant), DGD entered into an agreement with a third party to utilize certain rail facilities, truck rack facilities, and tanks for the transportation and storage of feedstocks and renewable diesel. The agreement commenced in the fourth quarter of 2022, upon completion of the DGD Port Arthur Plant, and has an initial term of 20 years with two automatic five-year renewal periods. In the fourth quarter of 2022, DGD recognized a finance lease ROU asset and related liability of approximately $500 million in connection with this agreement.
VALERO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Maturity Analyses
As of December 31, 2022, the remaining minimum lease payments due under our long-term leases were as follows (in millions):
| | | | | | | | | | | | | | | |
| Operating
Leases | | Finance
Leases | | | | |
| | | | | | | |
| 2023 | $ | 345 | | | $ | 350 | | | | | |
| 2024 | 240 | | | 287 | | | | | |
| 2025 | 163 | | | 278 | | | | | |
| 2026 | 125 | | | 254 | | | | | |
| 2027 | 81 | | | 224 | | | | | |
| Thereafter | 434 | | | 2,069 | | | | | |
| Total undiscounted lease payments | 1,388 | | | 3,462 | | | | | |
| Less: Amount associated with discounting | 301 | | | 1,068 | | | | | |
| Total lease liabilities | $ | 1,087 | | | $ | 2,394 | | | | | |
5. PROPERTY, PLANT, AND EQUIPMENT
Summary by Major Class
Major classes of property, plant, and equipment, including assets held under finance leases, consisted of the following (in millions):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Land | $ | 499 | | | $ | 494 | |
| Crude oil processing facilities | 32,699 | | | 32,744 | |
| Transportation and terminaling facilities | 5,900 | | | 5,747 | |
| Waste and renewable feedstocks processing facilities | 3,215 | | | 1,826 | |
| Corn processing facilities | 1,052 | | | 1,216 | |
| Administrative buildings | 1,095 | | | 1,055 | |
Finance lease ROU assets (see Note 4) | 2,906 | | | 2,293 | |
| Other | 1,886 | | | 1,835 | |
| Construction in progress | 1,324 | | | 1,862 | |
| Property, plant, and equipment, at cost | 50,576 | | | 49,072 | |
| Accumulated depreciation | (19,598) | | | (18,225) | |
| Property, plant, and equipment, net | $ | 30,978 | | | $ | 30,847 | |
Depreciation expense for the years ended December 31, 2022, 2021, and 2020 was $1.7 billion, $1.7 billion, and $1.6 billion, respectively.
Asset Impairment
Our ethanol plant located in Lakota, Iowa (Lakota ethanol plant) is currently configured to produce a higher-grade ethanol product, as opposed to fuel-grade ethanol, suitable for hand sanitizer blending or industrial purposes that has a higher market value than fuel-grade ethanol. During 2022, demand for
VALERO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
higher-grade ethanol declined and had a negative impact on the profitability of the plant. As a result, we tested the recoverability of the carrying value of the Lakota ethanol plant and concluded that it was impaired. Therefore, we reduced the carrying value of the plant to its estimated fair value and recognized an asset impairment loss of $61 million for the year ended December 31, 2022. See Note 18 for disclosure related to the method used to determine fair value.
Sale of Ethanol Plant
In June 2022, we sold our ethanol plant in Jefferson, Wisconsin (Jefferson ethanol plant) for $32 million, which resulted in a gain of $23 million that is included in depreciation and amortization expense for the year ended December 31, 2022.
Changes in Useful Lives
The Jefferson ethanol plant was temporarily idled in 2020 at the onset of the COVID-19 pandemic in response to the decreased demand for ethanol resulting from the effects of the pandemic on our business, and we had previously evaluated this plant for potential impairment assuming that operations would resume. However, we completed an evaluation of the plant during the third quarter of 2021 and concluded that it was no longer a strategic asset for our ethanol business. The plant’s operations permanently ceased at that time and we reduced its estimated useful life, which reduced its net book value to estimated salvage value. The additional depreciation expense of $48 million for the year ended December 31, 2021 resulting from this change did not have a material impact on our results of operations nor was there a material impact to our financial position.
Our ethanol plant in Riga, Michigan was temporarily idled in 2019 due to corn quality issues with the local third-party corn feedstock supply. Although we expected operations to resume after an improved corn harvest, we completed an evaluation of this plant during the third quarter of 2020 and concluded that it was no longer a strategic asset for our ethanol business. The plant’s operations permanently ceased at that time and we reduced its estimated useful life, which reduced its net book value to estimated salvage value. The additional depreciation expense of $30 million for the year ended December 31, 2020 resulting from this change did not have a material impact on our results of operations nor was there a material impact to our financial position.
VALERO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. DEFERRED CHARGES AND OTHER ASSETS
“Deferred charges and other assets, net” consisted of the following (in millions):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Deferred turnaround and catalyst costs, net | $ | 2,139 | | | $ | 1,853 | |
Operating lease ROU assets, net (see Note 4) | 1,114 | | | 1,284 | |
| Investments in nonconsolidated joint ventures | 724 | | | 734 | |
| Purchased compliance credits | 543 | | | 222 | |
| Goodwill | 260 | | | 260 | |
| Intangible assets, net | 202 | | | 218 | |
| Income taxes receivable | 26 | | | 586 | |
| Other | 863 | | | 719 | |
| Deferred charges and other assets, net | $ | 5,871 | | | $ | 5,876 | |
Amortization expense for deferred turnaround and catalyst costs and intangible assets was $745 million, $695 million, and $748 million for the years ended December 31, 2022, 2021, and 2020, respectively.
The entire balance of goodwill is related to our Refining segment. See Note 16 for information on our reportable segments.
VALERO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. ACCRUED EXPENSES AND OTHER LONG-TERM LIABILITIES
Accrued expenses and other long-term liabilities consisted of the following (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Accrued
Expenses | | Other Long-Term
Liabilities |
| December 31, | | December 31, |
| 2022 | | 2021 | | 2022 | | 2021 |
Operating lease liabilities (see Note 4) | $ | 311 | | | $ | 315 | | | $ | 776 | | | $ | 940 | |
Liability for unrecognized tax benefits (see Note 14) | — | | | — | | | 239 | | | 863 | |
| Defined benefit plan liabilities (see Note 12) | 35 | | | 41 | | | 448 | | | 601 | |
Repatriation tax liability (see Note 14) (a) | — | | | — | | | 301 | | | 367 | |
| Environmental liabilities | 21 | | | 35 | | | 296 | | | 269 | |
| Wage and other employee-related liabilities | 388 | | | 349 | | | 87 | | | 133 | |
| Accrued interest expense | 67 | | | 88 | | | — | | | — | |
Contract liabilities from contracts with customers (see Note 16) | 129 | | | 78 | | | — | | | — | |
Blending program obligations (see Note 18) | 189 | | | 268 | | | — | | | — | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Other accrued liabilities | 75 | | | 79 | | | 163 | | | 231 | |
| Accrued expenses and other long-term liabilities | $ | 1,215 | | | $ | 1,253 | | | $ | 2,310 | | | $ | 3,404 | |
________________________
(a)The current portion of repatriation tax liability is included in income taxes payable. As of December 31, 2022, the current portion of repatriation tax liability was $100 million. There was no current portion of repatriation tax liability as of December 31, 2021, as it was deemed paid in connection with the additional tax net operating loss (NOL) carryback on the superseding 2020 federal income tax return filed in the fourth quarter of 2021.
VALERO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. DEBT AND FINANCE LEASE OBLIGATIONS
Debt, at stated values, and finance lease obligations consisted of the following (in millions):
| | | | | | | | | | | | | | | | | |
| Final
Maturity | | December 31, |
| | 2022 | | 2021 |
| Credit facilities: | | | | | |
Valero Revolver | 2027 | | $ | — | | | $ | — | |
Canadian Revolver | 2023 | | — | | | — | |
| Accounts Receivable Sales Facility | 2023 | | — | | | — | |
| | | | | |
| DGD Revolver | 2024 | | 100 | | | 100 | |
| DGD Loan Agreement | 2023 | | 25 | | | 25 | |
IEnova Revolver | 2028 | | 717 | | | 679 | |
| Public debt: | | | | | |
Valero Senior Notes | | | | | |
1.200% | 2024 | | 167 | | | 169 | |
2.850% | 2025 | | 251 | | | 1,050 | |
3.65% | 2025 | | 189 | | | 324 | |
3.400% | 2026 | | 426 | | | 1,250 | |
2.150% | 2027 | | 578 | | | 600 | |
4.350% | 2028 | | 606 | | | 750 | |
4.000% | 2029 | | 439 | | | 1,000 | |
8.75% | 2030 | | 200 | | | 200 | |
2.800% | 2031 | | 472 | | | 500 | |
7.5% | 2032 | | 733 | | | 750 | |
6.625% | 2037 | | 1,442 | | | 1,500 | |
6.75% | 2037 | | 24 | | | 24 | |
10.500% | 2039 | | 113 | | | 113 | |
4.90% | 2045 | | 626 | | | 650 | |
3.650% | 2051 | | 855 | | | 950 | |
4.000% | 2052 | | 553 | | | — | |
7.45% | 2097 | | 70 | | | 100 | |
| | | | | |
| | | | | |
VLP Senior Notes | | | | | |
4.375% | 2026 | | 146 | | | 376 | |
4.500% | 2028 | | 474 | | | 500 | |
Debenture, 7.65% | 2026 | | 100 | | | 100 | |
Gulf Opportunity Zone Revenue Bonds, Series 2010, 4.00% | 2040 | | — | | | 300 | |
| Other debt | 2023 | | 19 | | | 26 | |
| Net unamortized debt issuance costs and other | | | (84) | | | (86) | |
| Total debt | | | 9,241 | | | 11,950 | |
Finance lease obligations (see Note 4) | | | 2,394 | | | 1,920 | |
| Total debt and finance lease obligations | | | 11,635 | | | 13,870 | |
| Less: Current portion | | | 1,109 | | | 1,264 | |
| Debt and finance lease obligations, less current portion | | | $ | 10,526 | | | $ | 12,606 | |
VALERO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Credit Facilities
Valero Revolver
In November 2022, we amended our revolving credit facility (the Valero Revolver), which has a borrowing capacity of $4 billion, to extend the maturity date from March 2024 to November 2027 and to transition the benchmark reference interest rate previously based on the London Interbank Offered Rate (LIBOR) to a secured overnight financing rate (SOFR). We have the option to increase the aggregate commitments under the Valero Revolver to $5.5 billion, subject to certain conditions. The Valero Revolver also provides for the issuance of letters of credit of up to $2.4 billion.
Effective November 2022, outstanding borrowings under the Valero Revolver bear interest, at our option, at either (i) the Adjusted Term SOFR or (ii) the Alternate Base Rate (each of these rates is defined in the Valero Revolver), plus the applicable margins. The Valero Revolver also requires payments for customary fees, including facility fees, letter of credit participation fees, and administrative agent fees. The interest rate and facility fees under the Valero Revolver are subject to adjustment based upon the credit ratings assigned to our senior unsecured debt.
Canadian Revolver
In November 2022, one of our Canadian subsidiaries amended its committed revolving credit facility (the Canadian Revolver) of C$150 million to extend the maturity date from November 2022 to November 2023. Outstanding borrowings under the Canadian Revolver bear interest at the adjusted term SOFR or applicable market rates as allowed under the terms of the agreement, plus applicable margins. The Canadian Revolver also provides for the issuance of letters of credit. The interest rates and fees under the Canadian Revolver are subject to adjustment based upon the credit ratings assigned to Valero’s senior unsecured debt.
Accounts Receivable Sales Facility
We have an accounts receivable sales facility with a group of third-party entities and financial institutions to sell eligible trade receivables on a revolving basis. In July 2022, we extended the maturity date of this facility to July 2023. Under this program, one of our marketing subsidiaries (Valero Marketing) sells eligible receivables, without recourse, to another of our subsidiaries (Valero Capital), whereupon the receivables are no longer owned by Valero Marketing. Valero Capital, in turn, sells an undivided percentage ownership interest in the eligible receivables, without recourse, to the third-party entities and financial institutions. To the extent that Valero Capital retains an ownership interest in the receivables it has purchased from Valero Marketing, such interest is included in our financial statements solely as a result of the consolidation of the financial statements of Valero Capital with those of Valero Energy Corporation; the receivables are not available to satisfy the claims of the creditors of Valero Marketing or Valero Energy Corporation.
As of December 31, 2022 and 2021, $3.0 billion and $2.8 billion, respectively, of our accounts receivable composed the designated pool of accounts receivable included in the program. All amounts outstanding under the accounts receivable sales facility are reflected as debt on our balance sheets and proceeds and repayments are reflected as cash flows from financing activities. Outstanding borrowings under the facility bear interest, at either (i) an adjusted daily simple SOFR or (ii) an alternate base rate as allowed under the terms of this facility, plus applicable margins. The interest rates under the program are subject
VALERO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
to adjustment based upon the credit ratings assigned to our senior unsecured debt. The program also requires payments for customary fees, including facility fees.
364-Day Revolving Credit Facility
In April 2020, we entered into an $875 million 364-Day Credit Agreement (the 364-Day Revolving Credit Facility) with several lenders. This facility provided for a revolving credit facility in an aggregate principal amount of up to $875 million. No borrowings were made under this facility prior to its maturity on April 12, 2021 and the facility was not renewed.
DGD Revolver
In March 2021, DGD, as described in Note 11, entered into a $400 million unsecured revolving credit facility (the DGD Revolver) with a syndicate of financial institutions that matures in March 2024. DGD has the option to increase the aggregate commitments under the DGD Revolver to $550 million, subject to certain restrictions. Initially, the DGD Revolver also provided for the issuance of letters of credit of up to $10 million. In September 2021, the DGD Revolver was amended to increase the letter of credit sublimit from $10 million to $50 million and to limit DGD’s indebtedness arising under other letters of credit that DGD may obtain up to $25 million at any one time outstanding. This restriction does not impact Valero’s letter of credit facilities. In November 2022, the DGD Revolver was amended to increase the letter of credit sublimit from $50 million to $150 million. The DGD Revolver is only available to fund the operations of DGD. DGD’s lenders do not have recourse against us. As of December 31, 2022, all outstanding borrowings under this revolver are reflected in current portion of debt as payment is expected to occur in 2023.
Outstanding borrowings under the DGD Revolver generally bear interest, at DGD’s option, at either (i) an alternate base rate or (ii) an adjusted LIBOR as allowed under the terms of the agreement for the applicable interest period in effect from time to time, plus the applicable margins. As of December 31, 2022 and 2021, the variable interest rate on the DGD Revolver was 5.880 percent and 1.860 percent, respectively. The DGD Revolver also requires payments for customary fees, including unused commitment fees, letter of credit fees, and administrative agent fees.
DGD Loan Agreement
DGD has a $50 million unsecured revolving loan agreement (the DGD Loan Agreement) with its members (Darling Ingredients Inc. (Darling) and us). In March 2022, the maturity date of this facility was extended to April 2023. Each member has committed $25 million, resulting in aggregate commitments of $50 million. The DGD Loan Agreement is only available to fund the operations of DGD. Any outstanding borrowings under this revolver represent loans made by the noncontrolling member as any transactions between DGD and us under this revolver are eliminated in consolidation.
Outstanding borrowings under the DGD Loan Agreement bear interest at the LIBOR for the applicable interest period in effect from time to time plus the applicable margin. As of December 31, 2022 and 2021, the variable interest rate on the DGD Loan Agreement was 6.672 percent and 2.603 percent, respectively. Principal and accrued interest are due on the last day of the calendar month unless DGD provides at least two days prior written notice of their election to extend repayment to the next calendar month end.
VALERO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
IEnova Revolver
Central Mexico Terminals, as described in Note 11, has a combined unsecured revolving credit facility (IEnova Revolver) with IEnova (defined in Note 11) that matures in February 2028. In 2020, the borrowing capacity under the IEnova Revolver was increased from $491 million to $660 million, and during the year ended December 31, 2021, it was increased to $830 million. IEnova may terminate this revolver at any time and demand repayment of all outstanding amounts; therefore, all outstanding borrowings are reflected in current portion of debt. The IEnova Revolver is only available to the operations of Central Mexico Terminals, and the creditors of Central Mexico Terminals do not have recourse against us.
Outstanding borrowings under the IEnova Revolver bear interest at the three-month LIBOR for the applicable interest period in effect from time to time plus the applicable margin. The interest rate under this revolver is subject to adjustment, with agreement by both parties, based upon changes in market conditions. As of December 31, 2022 and 2021, the variable interest rate was 7.393 percent and 3.781 percent, respectively.
Summary of Credit Facilities
We had outstanding borrowings, letters of credit issued, and availability under our credit facilities as follows (amounts in millions and currency in U.S. dollars, except as noted):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | December 31, 2022 |
| | Facility
Amount | | Maturity Date | | Outstanding
Borrowings | | Letters of Credit
Issued (a) | | Availability |
| | | | | |
| Committed facilities: | | | | | | | | | | |
| Valero Revolver | | $ | 4,000 | | | November 2027 | | $ | — | | | $ | 6 | | | $ | 3,994 | |
| Canadian Revolver | | C$ | 150 | | | November 2023 | | C$ | — | | | C$ | 5 | | | C$ | 145 | |
Accounts receivable sales facility | | $ | 1,300 | | | July 2023 | | $ | — | | | n/a | | $ | 1,300 | |
| | | | | | | | | | |
Committed facilities of VIEs (b): | | | | | | | | | | |
| DGD Revolver | | $ | 400 | | | March 2024 | | $ | 100 | | | $ | 117 | | | $ | 183 | |
| DGD Loan Agreement (c) | | $ | 25 | | | April 2023 | | $ | 25 | | | n/a | | $ | — | |
| IEnova Revolver | | $ | 830 | | | February 2028 | | $ | 717 | | | n/a | | $ | 113 | |
| Uncommitted facilities: | | | | | | | | | | |
| Letter of credit facilities | | n/a | | n/a | | n/a | | $ | 1,523 | | | n/a |
________________________
(a)Letters of credit issued as of December 31, 2022 expire at various times in 2023 through 2024.
(b)Creditors of the VIEs do not have recourse against us.
(c)The amounts shown for this facility represent the facility amount available from, and borrowings outstanding to, the noncontrolling member as any transactions between DGD and us under this facility are eliminated in consolidation.
We are charged letter of credit issuance fees under our various uncommitted short-term bank credit facilities. These uncommitted credit facilities have no commitment fees or compensating balance requirements.
VALERO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Activity under our credit facilities was as follows (in millions):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Borrowings: | | | | | |
| Accounts receivable sales facility | $ | 1,600 | | | $ | — | | | $ | 300 | |
| DGD Revolver | 759 | | | 276 | | | — | |
| DGD Loan Agreement | 50 | | | 25 | | | — | |
| IEnova Revolver | 105 | | | 81 | | | 250 | |
| Repayments: | | | | | |
| Accounts receivable sales facility | (1,600) | | | — | | | (400) | |
| DGD Revolver | (759) | | | (176) | | | — | |
| DGD Loan Agreement | (50) | | | — | | | — | |
| IEnova Revolver | (67) | | | — | | | — | |
Public Debt
During the year ended December 31, 2022, the following activity occurred:
•In November and December 2022, we used cash on hand to purchase and retire the following notes (in millions):
| | | | | | | | |
| Debt Purchased and Retired | | Principal
Amount |
| | |
| | |
| | |
| | |
2.150% Senior Notes due 2027 | | $ | 22 | |
4.500% VLP Senior Notes due 2028 | | 26 | |
| | |
| | |
2.800% Senior Notes due 2031 | | 28 | |
| | |
6.625% Senior Notes due 2037 | | 58 | |
4.90% Senior Notes due 2045 | | 24 | |
3.650% Senior Notes due 2051 | | 95 | |
4.000% Senior Notes due 2052 | | 97 | |
7.45% Senior Notes due 2097 | | 30 | |
| Various other Valero Senior Notes | | 62 | |
| Total | | $ | 442 | |
VALERO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
•In September 2022, we used cash on hand to purchase and retire the following notes in connection with cash tender offers that we publicly announced in August 2022 and completed in September 2022 (in millions):
| | | | | | | | |
| Debt Purchased and Retired | | Principal
Amount |
3.65% Senior Notes due 2025 | | $ | 48 | |
2.850% Senior Notes due 2025 | | 291 | |
4.375% VLP Senior Notes due 2026 | | 62 | |
3.400% Senior Notes due 2026 | | 166 | |
4.350% Senior Notes due 2028 | | 131 | |
4.000% Senior Notes due 2029 | | 552 | |
| Total | | $ | 1,250 | |
•In June 2022, we reduced our debt through the acquisition of the $300 million of 4.00 percent Gulf Opportunity Zone Revenue Bonds Series 2010 that are due December 1, 2040, but were subject to mandatory tender on June 1, 2022. We have the option to effectuate a remarketing of these bonds.
•In February 2022, we issued $650 million of 4.000 percent Senior Notes due June 1, 2052. Proceeds from this debt issuance totaled $639 million before deducting the underwriting discount and other debt issuance costs. The proceeds and cash on hand were used to purchase and retire the following notes in connection with cash tender offers that we publicly announced and completed in February 2022 (in millions):
| | | | | | | | |
| Debt Purchased and Retired | | Principal
Amount |
3.65% Senior Notes due 2025 | | $ | 72 | |
2.850% Senior Notes due 2025 | | 507 | |
4.375% VLP Senior Notes due 2026 | | 168 | |
3.400% Senior Notes due 2026 | | 653 | |
| Total | | $ | 1,400 | |
During the year ended December 31, 2021, the following activity occurred:
•In November 2021, we issued $500 million of 2.800 percent Senior Notes due December 1, 2031 and $950 million of 3.650 percent Senior Notes due December 1, 2051. Proceeds from these debt issuances totaled $1.446 billion before deducting the underwriting discounts and other debt issuance costs. These proceeds and cash on hand were used to purchase and retire or redeem the
VALERO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
following notes in connection with cash tender offers that we publicly announced in November 2021 and completed in December 2021 (in millions):
| | | | | | | | | | | | |
Debt Purchased and
Retired or Redeemed | | Principal
Amount | | | | |
2.700% Senior Notes due 2023 | | $ | 850 | | | | | |
1.200% Senior Notes due 2024 | | 756 | | | | | |
3.65% Senior Notes due 2025 | | 276 | | | | | |
4.375% VLP Senior Notes due 2026 | | 124 | | | | | |
10.500% Senior Notes due 2039 | | 137 | | | | | |
| Total | | $ | 2,143 | | | | | |
In connection with the early debt redemption and retirement activity described above, we recognized a charge of $193 million in “other income, net” comprised of $179 million of premiums paid, $10 million of unamortized debt discounts and deferred debt costs, and $4 million of bank fees.
•In September 2021, we redeemed our Floating Rate Senior Notes due September 15, 2023 (the Floating Rate Notes) for $575 million.
During the year ended December 31, 2020, the following activity occurred:
•In September 2020, we issued the following senior notes:
◦the Floating Rate Notes, which bore interest at a rate of three-month LIBOR plus 1.150 percent per annum, subject to certain adjustments set forth in the terms of the Floating Rate Notes;
◦$925 million of 1.200 percent Senior Notes due March 15, 2024;
◦$400 million of 2.850 percent Senior Notes due April 15, 2025 that constitute an additional issuance of our 2.850 percent Senior Notes due April 15, 2025 that were issued in April 2020 (see below); and
◦$600 million of 2.150 percent Senior Notes due September 15, 2027.
•In April 2020, we issued $850 million of 2.700 percent Senior Notes due April 15, 2023 and $650 million of 2.850 percent Senior Notes due April 15, 2025.
Proceeds from the April and September 2020 debt issuances totaled $4.020 billion before deducting the underwriting discounts and other debt issuance costs.
VALERO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Other Disclosures
“Interest and debt expense, net of capitalized interest” is comprised as follows (in millions):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Interest and debt expense | $ | 619 | | | $ | 651 | | | $ | 638 | |
| Less: Capitalized interest | 57 | | | 48 | | | 75 | |
Interest and debt expense, net of capitalized interest | $ | 562 | | | $ | 603 | | | $ | 563 | |
Our credit facilities and other debt arrangements contain various customary restrictive covenants, including cross-default and cross-acceleration clauses.
Principal maturities for our debt obligations as of December 31, 2022 were as follows (in millions):
| | | | | |
| 2023 (a) | $ | 861 | |
| 2024 | 167 | |
| 2025 | 441 | |
| 2026 | 672 | |
| 2027 | 578 | |
| Thereafter | 6,606 | |
| Net unamortized debt issuance costs and other | (84) | |
| Total debt | $ | 9,241 | |
________________________
(a)Maturities for 2023 include the DGD Revolver, the DGD Loan Agreement, and the IEnova Revolver.
9. COMMITMENTS AND CONTINGENCIES
Purchase Obligations
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 and adequate storage capacity to operate our refineries and ethanol plants. Substantially all of our purchase obligations are based on market prices 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. None of these obligations is associated with suppliers’ financing arrangements. These purchase obligations are not reflected as liabilities.
Self-Insurance
We are self-insured for certain medical and dental, workers’ compensation, automobile liability, general liability, and other third-party liability claims up to applicable retention limits. Liabilities are accrued for self-insured claims, or when estimated losses exceed coverage limits, and when sufficient information is
VALERO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
available to reasonably estimate the amount of the loss. These liabilities are included in accrued expenses and other long-term liabilities.
10. EQUITY
Share Activity
Activity in the number of shares of common stock and treasury stock was as follows (in millions):
| | | | | | | | | | | |
| Common
Stock | | Treasury
Stock |
| Balance as of December 31, 2019 | 673 | | | (264) | |
Transactions in connection with stock-based compensation plans | — | | | 1 | |
| Purchases of common stock for treasury | — | | | (2) | |
| Balance as of December 31, 2020 | 673 | | | (265) | |
Transactions in connection with stock-based compensation plans | — | | | 1 | |
| | | |
| Balance as of December 31, 2021 | 673 | | | (264) | |
Transactions in connection with stock-based compensation plans | — | | | 1 | |
| Purchases of common stock for treasury | — | | | (38) | |
| Balance as of December 31, 2022 | 673 | | | (301) | |
Preferred Stock
We have 20 million shares of preferred stock authorized with a par value of $0.01 per share. No shares of preferred stock were outstanding as of December 31, 2022 or 2021.
Treasury Stock
We purchase shares of our outstanding common stock as authorized by our board of directors (Board), including under share purchase programs (described below) and with respect to our employee stock-based compensation plans.
On January 23, 2018, our Board authorized our purchase of up to $2.5 billion of our outstanding common stock with no expiration date, and we completed all authorized share purchases under that program during the second quarter of 2022. On July 7, 2022, we announced that our Board authorized our purchase of up to an additional $2.5 billion of our outstanding common stock with no expiration date, and we completed all authorized share purchases under that program during the fourth quarter of 2022. On October 26, 2022, our Board authorized our purchase of up to an additional $2.5 billion of our outstanding common stock with no expiration date (the October 2022 Program). As of December 31, 2022, we had $2.3 billion remaining available for purchase under the October 2022 Program. On February 23, 2023, our Board authorized our purchase of up to an additional $2.5 billion of our outstanding common stock with no expiration date, which is in addition to the amount remaining under the October 2022 Program.
Common Stock Dividends
On January 31, 2023, our Board declared a quarterly cash dividend of $1.02 per common share payable on March 16, 2023 to holders of record at the close of business on February 14, 2023.
VALERO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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-Tax
Amount | | Tax Expense
(Benefit) | | Net Amount |
| Year ended December 31, 2022 | | | | | |
| Foreign currency translation adjustment | $ | (613) | | | $ | (7) | | | $ | (606) | |
| Pension and other postretirement benefits: | | | | | |
| | | | | |
| Net actuarial gain arising during the year | 244 | | | 57 | | | 187 | |
| | | | | |
| | | | | |
| | | | | |
| Amounts reclassified into income related to: | | | | | |
| Net actuarial loss | 52 | | | 12 | | | 40 | |
| Prior service credit | (22) | | | (5) | | | (17) | |
| Settlement loss | 61 | | | 13 | | | 48 | |
| | | | | |
Net gain on pension and other postretirement benefits | 335 | | | 77 | | | 258 | |
Derivative instruments designated and qualifying as cash flow hedges: | | | | | |
| Net loss arising during the year | (292) | | | (32) | | | (260) | |
| Net loss reclassified into income | 286 | | | 32 | | | 254 | |
| Net loss on cash flow hedges | (6) | | | — | | | (6) | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Other comprehensive loss | $ | (284) | | | $ | 70 | | | $ | (354) | |
VALERO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | | | | | | | | | | | | | | | | |
| Before-Tax
Amount | | Tax Expense
(Benefit) | | Net Amount |
| Year ended December 31, 2021 | | | | | |
| Foreign currency translation adjustment | $ | (47) | | | $ | — | | | $ | (47) | |
| Pension and other postretirement benefits: | | | | | |
| Gain arising during the year related to: | | | | | |
| Net actuarial gain | 317 | | | 69 | | | 248 | |
| | | | | |
| Prior service cost | (4) | | | (1) | | | (3) | |
| | | | | |
| Amounts reclassified into income related to: | | | | | |
| Net actuarial loss | 80 | | | 18 | | | 62 | |
| Prior service credit | (25) | | | (6) | | | (19) | |
| Settlement loss | 8 | | | 2 | | | 6 | |
| Effect of exchange rates | 2 | | | — | | | 2 | |
Net gain on pension and other postretirement benefits | 378 | | | 82 | | | 296 | |
Derivative instruments designated and qualifying as cash flow hedges: | | | | | |
| Net loss arising during the year | (48) | | | (5) | | | (43) | |
| Net loss reclassified into income | 46 | | | 5 | | | 41 | |
| Net loss on cash flow hedges | (2) | | | — | | | (2) | |
| Other comprehensive income | $ | 329 | | | $ | 82 | | | $ | 247 | |
| | | | | |
| Year ended December 31, 2020 | | | | | |
| Foreign currency translation adjustment | $ | 161 | | | $ | — | | | $ | 161 | |
| Pension and other postretirement benefits: | | | | | |
| Loss arising during the year related to: | | | | | |
| Net actuarial loss | (128) | | | (26) | | | (102) | |
| | | | | |
| Prior service cost | (5) | | | (1) | | | (4) | |
| | | | | |
| Amounts reclassified into income related to: | | | | | |
| Net actuarial loss | 74 | | | 17 | | | 57 | |
| Prior service credit | (26) | | | (6) | | | (20) | |
| Settlement loss | 5 | | | 1 | | | 4 | |
| | | | | |
Net loss on pension and other postretirement benefits | (80) | | | (15) | | | (65) | |
Derivative instruments designated and qualifying as cash flow hedges: | | | | | |
| Net gain arising during the year | 36 | | | 3 | | | 33 | |
| Net gain reclassified into income | (34) | | | (4) | | | (30) | |
| Net gain on cash flow hedges | 2 | | | (1) | | | 3 | |
| Other comprehensive income | $ | 83 | | | $ | (16) | | | $ | 99 | |
VALERO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss by component, net of tax, were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Foreign
Currency
Translation
Adjustment | | Defined
Benefit
Plans
Items | | Gains
(Losses) on
Cash Flow
Hedges | | | | Total |
| Balance as of December 31, 2019 | $ | (676) | | | $ | (672) | | | $ | (3) | | | | | $ | (1,351) | |
Other comprehensive income (loss) before reclassifications | 161 | | | (106) | | | 14 | | | | | 69 | |
Amounts reclassified from accumulated other comprehensive loss | — | | | 41 | | | (13) | | | | | 28 | |
| | | | | | | | | |
| Other comprehensive income (loss) | 161 | | | (65) | | | 1 | | | | | 97 | |
| Balance as of December 31, 2020 | (515) | | | (737) | | | (2) | | | | | (1,254) | |
Other comprehensive income (loss) before reclassifications | (47) | | | 245 | | | (21) | | | | | 177 | |
Amounts reclassified from accumulated other comprehensive loss | — | | | 49 | | | 18 | | | | | 67 | |
| Effect of exchange rates | — | | | 2 | | | — | | | | | 2 | |
| Other comprehensive income (loss) | (47) | | | 296 | | | (3) | | | | | 246 | |
| Balance as of December 31, 2021 | (562) | | | (441) | | | (5) | | | | | (1,008) | |
Other comprehensive income (loss) before reclassifications | (606) | | | 187 | | | (114) | | | | | (533) | |
Amounts reclassified from accumulated other comprehensive loss | — | | | 71 | | | 111 | | | | | 182 | |
| | | | | | | | | |
| Other comprehensive income (loss) | (606) | | | 258 | | | (3) | | | | | (351) | |
| Balance as of December 31, 2022 | $ | (1,168) | | | $ | (183) | | | $ | (8) | | | | | $ | (1,359) | |
VALERO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Gains (losses) reclassified out of accumulated other comprehensive loss and into net income (loss) were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Details about
Accumulated Other
Comprehensive Loss
Components | | | | Affected Line
Item in the
Statement of
Income |
| Year Ended December 31, | |
| 2022 | | 2021 | | 2020 | |
Amortization of items related to defined benefit pension plans: | | | | | | | | |
| Net actuarial loss | | $ | (52) | | | $ | (80) | | | $ | (74) | | | (a) Other income, net |
| Prior service credit | | 22 | | | 25 | | | 26 | | | (a) Other income, net |
| Settlement loss | | (61) | | | (8) | | | (5) | | | (a) Other income, net |
| | (91) | | | (63) | | | (53) | | | Total before tax |
| | 20 | | | 14 | | | 12 | | | Tax benefit |
| | $ | (71) | | | $ | (49) | | | $ | (41) | | | Net of tax |
| | | | | | | | |
| Gains (losses) on cash flow hedges: | | | | | | | | |
| Commodity contracts | | $ | (286) | | | $ | (46) | | | $ | 34 | | | Revenues |
| | (286) | | | (46) | | | 34 | | | Total before tax |
| | 32 | | | 5 | | | (4) | | | Tax (expense) benefit |
| | $ | (254) | | | $ | (41) | | | $ | 30 | | | Net of tax |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Total reclassifications for the year | | $ | (325) | | | $ | (90) | | | $ | (11) | | | Net of tax |
________________________
(a)These accumulated other comprehensive loss components are included in the computation of net periodic benefit cost, as discussed in Note 12.
11. VARIABLE INTEREST ENTITIES
Consolidated VIEs
In the normal course of business, we have financial interests in certain entities that have been determined to be VIEs. We consolidate a VIE when we have a variable interest in an entity for which we are the primary beneficiary such that we have (i) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb losses of or the right to receive benefits from the VIE that could potentially be significant to the VIE. In order to make this determination, we evaluated our contractual arrangements with the VIE, 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 the consolidated VIEs:
•DGD is a joint venture with a subsidiary of Darling that owns and operates two plants that process waste and renewable feedstocks (predominately animal fats, used cooking oils, and inedible distillers corn oils) into renewable diesel and renewable naphtha. One plant is located next to our St. Charles Refinery (the DGD St. Charles Plant) and the other plant is the DGD
VALERO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Port Arthur Plant. Our significant agreements with DGD include an operations agreement that outlines our responsibilities as operator of both plants.
As operator, we operate the plants and perform certain day-to-day operating and management functions for DGD as an independent contractor. The operations agreement provides us (as operator) with certain power to direct the activities that most significantly impact DGD’s economic performance. Because this agreement conveys such power to us and is separate from our ownership rights, we determined that DGD was a VIE. For this reason and because we hold a 50 percent ownership interest that provides us with significant economic rights and obligations, we determined that we are the primary beneficiary of DGD. DGD has risk associated with its operations because it generates revenues from external customers.
•Central Mexico Terminals is a collective group of three subsidiaries of Infraestructura Energetica Nova, S.A.P.I. de C.V. (IEnova), a Mexican company and indirect subsidiary of Sempra Energy, a U.S. public company. We have terminaling agreements with Central Mexico Terminals that represent variable interests because we have determined them to be finance leases due to our exclusive use of the terminals. Although we do not have an ownership interest in the entities that own each of the three terminals, the finance leases convey to us (i) the power to direct the activities that most significantly impact the economic performance of all three terminals and (ii) the ability to influence the benefits received or the losses incurred by the terminals because of our use of the terminals. As a result, we determined each of the entities was a VIE and that we are the primary beneficiary of each. Substantially all of Central Mexico Terminals’ revenues will be derived from us; therefore, we believe 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’ contractual arrangements transfer the power to us to direct the activities that most significantly impact their economic performance or reduce the exposure to operational variability and risk of loss created by the entity that otherwise would be held exclusively by the equity owners. Furthermore, we determined that we are the primary beneficiary of these VIEs because (i) certain contractual arrangements (exclusive of our ownership rights) provide us with the power to direct the activities that most significantly impact the economic performance of these entities and/or (ii) our 50 percent ownership interests provide us with significant economic rights and obligations.
The assets of the consolidated VIEs can only be used to settle their own obligations and the creditors of the consolidated VIEs have no recourse to our other assets. We generally do not provide financial guarantees to the VIEs. Although we have provided credit facilities to some of the VIEs in support of their construction or acquisition activities, these transactions are eliminated in consolidation. Our financial position, results of operations, and cash flows are impacted by the performance of the consolidated VIEs, net of intercompany eliminations, to the extent of our ownership interest in each VIE.
VALERO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents summarized balance sheet information for the significant assets and liabilities of the consolidated VIEs, which are included in our balance sheets (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| DGD | | Central
Mexico
Terminals | | Other | | Total |
| December 31, 2022 | | | | | | | |
| Assets | | | | | | | |
| Cash and cash equivalents | $ | 133 | | | $ | — | | | $ | 16 | | | $ | 149 | |
| Other current assets | 1,106 | | | 7 | | | 32 | | | 1,145 | |
| Property, plant, and equipment, net | 3,785 | | | 681 | | | 79 | | | 4,545 | |
| Liabilities | | | | | | | |
Current liabilities, including current portion of debt and finance lease obligations | $ | 626 | | | $ | 737 | | | $ | 21 | | | $ | 1,384 | |
Debt and finance lease obligations, less current portion | 693 | | | — | | | — | | | 693 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| |
| | | | | | | |
| December 31, 2021 | | | | | | | |
| Assets | | | | | | | |
| Cash and cash equivalents | $ | 21 | | | $ | — | | | $ | 15 | | | $ | 36 | |
| Other current assets | 558 | | | 10 | | | 13 | | | 581 | |
| Property, plant, and equipment, net | 2,629 | | | 676 | | | 91 | | | 3,396 | |
| Liabilities | | | | | | | |
Current liabilities, including current portion of debt and finance lease obligations | $ | 398 | | | $ | 729 | | | $ | 9 | | | $ | 1,136 | |
Debt and finance lease obligations, less current portion | 264 | | | — | | | 20 | | | 284 | |
Nonconsolidated VIEs
We hold variable interests in VIEs that have not been consolidated because we are not considered the primary beneficiary. These nonconsolidated VIEs are not material to our financial position or results of operations and are accounted for as equity investments.
On April 19, 2021, we sold a 24.99 percent membership interest in MVP Terminalling, LLC (MVP), a nonconsolidated joint venture, for $270 million that resulted in a gain of $62 million, which is included in “other income, net” for the year ended December 31, 2021. MVP owns and operates a marine terminal (the MVP Terminal) located on the Houston Ship Channel in Pasadena, Texas. We retained a 25.01 percent membership interest in MVP.
VALERO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. EMPLOYEE BENEFIT PLANS
Defined Benefit Plans
We have defined benefit pension plans, some of which are subject to collective bargaining agreements, that cover most of our employees. These plans provide eligible employees with retirement income based primarily on years of service and compensation during specific periods under final average pay and cash balance formulas. We fund all of 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’s minimum funding standard. We typically do not fund or fully fund U.S. nonqualified and certain foreign pension plans that are not subject to funding requirements because contributions to these pension plans may be less economic and investment returns may be less attractive than our other investment alternatives.
We also provide health care and life insurance benefits for certain retired employees through our postretirement benefit plans. Most of our 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 an acquisition became eligible for postretirement benefits under our plans as determined by the terms of the relevant acquisition agreement.
VALERO ENERGY CORPORATION
NOTES 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 funded status of our defined benefit plans as of and for the years ended below were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension Plans | | Other Postretirement
Benefit Plans |
| December 31, | | December 31, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Changes in benefit obligation | | | | | | | |
| Benefit obligation as of beginning of year | $ | 3,463 | | | $ | 3,625 | | | $ | 347 | | | $ | 358 | |
| Service cost | 152 | | | 161 | | | 6 | | | 7 | |
| Interest cost | 85 | | | 73 | | | 8 | | | 7 | |
| | | | | | | |
| Participant contributions | — | | | — | | | 13 | | | 13 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Benefits paid | (366) | | | (284) | | | (29) | | | (29) | |
| Actuarial gain | (882) | | | (111) | | | (86) | | | (9) | |
| | | | | | | |
| Foreign currency exchange rate changes | (39) | | | (1) | | | (1) | | | — | |
| | | | | | | |
| Benefit obligation as of end of year | $ | 2,413 | | | $ | 3,463 | | | $ | 258 | | | $ | 347 | |
| | | | | | | |
| Changes in plan assets (a) | | | | | | | |
| Fair value of plan assets as of beginning of year | $ | 3,303 | | | $ | 3,067 | | | $ | — | | | $ | — | |
| Actual return on plan assets | (532) | | | 389 | | | — | | | — | |
| Company contributions | 120 | | | 135 | | | 16 | | | 16 | |
| Participant contributions | — | | | — | | | 13 | | | 13 | |
| Benefits paid | (366) | | | (284) | | | (29) | | | (29) | |
| | | | | | | |
| Foreign currency exchange rate changes | (40) | | | (4) | | | — | | | — | |
| | | | | | | |
| Fair value of plan assets as of end of year | $ | 2,485 | | | $ | 3,303 | | | $ | — | | | $ | — | |
| | | | | | | |
| Reconciliation of funded status (a) | | | | | | | |
| Fair value of plan assets as of end of year | $ | 2,485 | | | $ | 3,303 | | | $ | — | | | $ | — | |
| Less: Benefit obligation as of end of year | 2,413 | | | 3,463 | | | 258 | | | 347 | |
| Funded status as of end of year | $ | 72 | | | $ | (160) | | | $ | (258) | | | $ | (347) | |
| | | | | | | |
| Accumulated benefit obligation | $ | 2,271 | | | $ | 3,238 | | | 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 from our obligations under the pension plans. As a result, the reconciliation of funded status does not reflect the effect of plan assets that exist for all of our defined benefit plans. See Note 18 for the assets associated with certain U.S. nonqualified pension plans.
VALERO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The actuarial gain for the year ended December 31, 2022 primarily resulted from an increase in the discount rates used to determine our benefit obligations for our pension plans from 2.93 percent in 2021 to 5.19 percent in 2022 due primarily to rising interest rates during 2022 as a result of actions by the Federal Reserve System and other central banks to address inflation. The actuarial gain for the year ended December 31, 2021 primarily resulted from an increase in the discount rates used to determine our benefit obligations for our pension plans from 2.62 percent in 2020 to 2.93 percent in 2021.
Benefits paid for the year ended December 31, 2022 were higher than those paid in 2021 due to a greater number of participants retiring in 2022 who elected lump-sum distributions. We believe that the increase in lump-sum elections was driven by the negative impact higher interest rates will have on lump-sum payments made after December 31, 2022.
The fair value of our plan assets as of December 31, 2022 was unfavorably impacted by the negative return on plan assets resulting primarily from a significant decline in equity market prices throughout the year. The fair value of our plan assets as of December 31, 2021 was favorably impacted by the return on plan assets resulting primarily from an improvement in equity market prices throughout the year.
Amounts recognized in our balance sheet for our pension and other postretirement benefits plans include (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension Plans | | Other Postretirement
Benefit Plans |
| December 31, | | December 31, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Deferred charges and other assets, net | $ | 297 | | | $ | 135 | | | $ | — | | | $ | — | |
| Accrued expenses | (14) | | | (19) | | | (21) | | | (22) | |
| Other long-term liabilities | (211) | | | (276) | | | (237) | | | (325) | |
| $ | 72 | | | $ | (160) | | | $ | (258) | | | $ | (347) | |
The following table presents information for our pension plans with projected benefit obligations in excess of plan assets (in millions):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Projected benefit obligation | $ | 249 | | | $ | 335 | |
| Fair value of plan assets | 24 | | | 40 | |
The following table presents information for our pension plans with accumulated benefit obligations in excess of plan assets (in millions):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Accumulated benefit obligation | $ | 209 | | | $ | 265 | |
| Fair value of plan assets | 24 | | | 31 | |
VALERO ENERGY CORPORATION
NOTES 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 follows for the years ending December 31 (in millions):
| | | | | | | | | | | |
| Pension
Benefits | | Other
Postretirement
Benefits |
| 2023 | $ | 159 | | | $ | 21 | |
| 2024 | 203 | | | 21 | |
| 2025 | 181 | | | 20 | |
| 2026 | 192 | | | 19 | |
| 2027 | 198 | | | 19 | |
| 2028-2032 | 969 | | | 88 | |
We plan to contribute $108 million to our pension plans and $21 million to our other postretirement benefit plans during 2023.
The components of net periodic benefit cost related to our defined benefit plans were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension Plans | | Other Postretirement
Benefit Plans |
| Year Ended December 31, | | Year Ended December 31, |
| 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
| Service cost | $ | 152 | | | $ | 161 | | | $ | 140 | | | $ | 6 | | | $ | 7 | | | $ | 6 | |
| Interest cost | 85 | | | 73 | | | 85 | | | 8 | | | 7 | | | 9 | |
| Expected return on plan assets | (192) | | | (192) | | | (179) | | | — | | | — | | | — | |
| Amortization of: | | | | | | | | | | | |
| Net actuarial (gain) loss | 52 | | | 81 | | | 74 | | | — | | | (1) | | | — | |
| Prior service credit | (18) | | | (18) | | | (19) | | | (4) | | | (7) | | | (7) | |
| Settlement loss | 61 | | | 8 | | | 5 | | | — | | | — | | | — | |
| Net periodic benefit cost | $ | 140 | | | $ | 113 | | | $ | 106 | | | $ | 10 | | | $ | 6 | | | $ | 8 | |
The components of net periodic benefit cost other than the service cost component (i.e., the non-service cost components) are included in “other income, net.”
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 over 10 percent of the greater of the projected benefit obligation or market-related value of plan assets (smoothed asset value) over the average remaining service period of active employees expected to receive benefits under each respective plan. Amortization of prior service credit shown in the preceding table was based on a straight-line amortization of the credit over the average remaining service period of employees expected to receive benefits under each respective plan.
VALERO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Pre-tax amounts recognized in other comprehensive income (loss) were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension Plans | | Other Postretirement
Benefit Plans |
| Year Ended December 31, | | Year Ended December 31, |
| 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
Net gain (loss) arising during the year: | | | | | | | | | | | |
| Net actuarial gain (loss) | $ | 158 | | | $ | 308 | | | $ | (105) | | | $ | 86 | | | $ | 9 | | | $ | (23) | |
| Prior service cost | — | | | (4) | | | (5) | | | — | | | — | | | — | |
| | | | | | | | | | | |
Net (gain) loss reclassified into income: | | | | | | | | | | | |
| Net actuarial (gain) loss | 53 | | | 81 | | | 74 | | | (1) | | | (1) | | | — | |
| Prior service credit | (18) | | | (18) | | | (19) | | | (4) | | | (7) | | | (7) | |
| Settlement loss | 61 | | | 8 | | | 5 | | | — | | | — | | | — | |
| Effect of exchange rates | — | | | 2 | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | |
Total changes in other comprehensive income (loss) | $ | 254 | | | $ | 377 | | | $ | (50) | | | $ | 81 | | | $ | 1 | | | $ | (30) | |
The pre-tax amounts in accumulated other comprehensive loss that have not yet been recognized as components of net periodic benefit cost were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension Plans | | Other Postretirement
Benefit Plans |
| December 31, | | December 31, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Net actuarial (gain) loss | $ | 342 | | | $ | 615 | | | $ | (89) | | | $ | (4) | |
| Prior service credit | (25) | | | (44) | | | (2) | | | (6) | |
| Total | $ | 317 | | | $ | 571 | | | $ | (91) | | | $ | (10) | |
The weighted-average assumptions used to determine the benefit obligations were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension Plans | | Other Postretirement
Benefit Plans |
| December 31, | | December 31, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Discount rate | 5.19 | % | | 2.93 | % | | 5.20 | % | | 2.96 | % |
| Rate of compensation increase | 3.76 | % | | 3.70 | % | | n/a | | n/a |
Interest crediting rate for cash balance plans | 3.76 | % | | 3.03 | % | | n/a | | n/a |
The discount rate assumption used to determine the benefit obligations as of December 31, 2022 and 2021 for the majority of our pension plans and other postretirement benefit plans was based on the Aon AA Only Above Median yield curve and considered the timing of the projected cash outflows under our plans. This curve was designed by Aon, our actuarial consultant, to provide a means for plan sponsors to
VALERO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
value the liabilities of their pension plans or postretirement benefit plans. To develop this curve, a hypothetical double-A yield curve represented by a series of annualized individual discount rates with maturities from six months to 99 years is constructed. Each bond issue underlying the double-A yield curve is required to have an average rating of double-A when averaging all available ratings by Moody’s Investors Service, Standard & Poor’s Ratings Services, and Fitch Ratings. Only the bonds representing the 50 percent highest yielding issuances of this double-A yield curve are then included in the Aon AA Only Above Median yield curve.
We based our discount rate assumption on the Aon AA Only Above Median yield curve because we believe it is representative of the types of bonds we would use to settle our pension and other postretirement benefit plan liabilities as of those dates. We believe that the yields associated with the bonds used to develop this yield curve reflect the current level of interest rates.
The weighted-average assumptions used to determine the net periodic benefit cost were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension Plans | | Other Postretirement
Benefit Plans |
| Year Ended December 31, | | Year Ended December 31, |
| 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
| Discount rate | 2.94 | % | | 2.62 | % | | 3.14 | % | | 2.96 | % | | 2.64 | % | | 3.32 | % |
Expected long-term rate of return on plan assets | 6.71 | % | | 7.09 | % | | 7.20 | % | | n/a | | n/a | | n/a |
| Rate of compensation increase | 3.70 | % | | 3.66 | % | | 3.75 | % | | n/a | | n/a | | n/a |
Interest crediting rate for cash balance plans | 3.03 | % | | 3.03 | % | | 3.03 | % | | n/a | | n/a | | n/a |
The assumed health care cost trend rates were as follows:
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Health care cost trend rate assumed for the next year | 6.78 | % | | 6.61 | % |
Rate to which the cost trend rate was assumed to decline (the ultimate trend rate) | 4.97 | % | | 5.00 | % |
| Year that the rate reaches the ultimate trend rate | 2032 | | 2026 |
VALERO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents the fair values of the assets of our pension plans (in millions) as of December 31, 2022 and 2021 by level of the fair value hierarchy. Assets categorized in Level 1 of the hierarchy are measured at fair value using a market approach based on unadjusted quoted prices from national securities exchanges. Assets categorized in Level 2 of the hierarchy are measured at net asset value in a market that is not active or inputs other than quoted prices that are observable. No assets were categorized in Level 3 of the hierarchy as of December 31, 2022 and 2021. As previously noted, we do not fund or fully fund U.S. nonqualified and certain foreign pension plans that are not subject to funding requirements, and we do not fund our other postretirement benefit plans.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | | | | | |
| Level 1 | | Level 2 | | Total | | Level 1 | | Level 2 | | Total | | | | | | |
| Equity securities (a) | $ | 528 | | | $ | — | | | $ | 528 | | | $ | 681 | | | $ | — | | | $ | 681 | | | | | | | |
| Mutual funds | 191 | | | — | | | 191 | | | 246 | | | — | | | 246 | | | | | | | |
| Corporate debt instruments (a) | — | | | 253 | | | 253 | | | — | | | 355 | | | 355 | | | | | | | |
| Government securities | 69 | | | 127 | | | 196 | | | 94 | | | 141 | | | 235 | | | | | | | |
| Common collective trusts (b) | — | | | 940 | | | 940 | | | — | | | 1,202 | | | 1,202 | | | | | | | |
| Pooled separate accounts (c) | — | | | 279 | | | 279 | | | — | | | 370 | | | 370 | | | | | | | |
| Private funds | — | | | 43 | | | 43 | | | — | | | 112 | | | 112 | | | | | | | |
| Insurance contract | — | | | 14 | | | 14 | | | — | | | 15 | | | 15 | | | | | | | |
| Interest and dividends receivable | 5 | | | — | | | 5 | | | 5 | | | — | | | 5 | | | | | | | |
| Cash and cash equivalents | 38 | | | 3 | | | 41 | | | 82 | | | — | | | 82 | | | | | | | |
| Securities transactions payable, net | (5) | | | — | | | (5) | | | — | | | — | | | — | | | | | | | |
| Total pension plan assets | $ | 826 | | | $ | 1,659 | | | $ | 2,485 | | | $ | 1,108 | | | $ | 2,195 | | | $ | 3,303 | | | | | | | |
________________________
(a)This class of securities includes domestic and international securities, which are held in a wide range of industry sectors.
(b)This class primarily includes investments in approximately 80 percent equities and 20 percent bonds as of December 31, 2022 and 2021.
(c)This class primarily includes investments in approximately 55 percent equities and 45 percent bonds as of December 31, 2022 and 2021.
The investment policies and strategies for the assets of our pension plans incorporate a well-diversified approach that is expected to earn long-term returns from capital appreciation and a growing stream of current income. This approach recognizes that assets are exposed to risk and the market value of the pension plans’ assets may fluctuate from year to year. Risk tolerance is determined based on our financial ability to withstand risk within the investment program and the willingness to accept return volatility. In line with the investment 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 securities and a blend of U.S. growth and value stocks of various sizes of capitalization. Fixed income securities include bonds and notes issued by the U.S. government and its agencies, corporate bonds, and mortgage-backed securities. The aggregate asset allocation is reviewed on an annual basis. As of December 31, 2022, the target allocations for plan assets under our primary pension plan are 70 percent equity securities 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 an expected rate of return based on the target asset allocation of a plan’s
VALERO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
assets. The underlying assumptions regarding expected rates of return for each asset class reflect Aon’s best expectations for these asset classes. The model reflects the positive effect of periodic rebalancing among diversified asset classes. We select an expected asset return that is supported by this model.
Defined Contribution Plans
We 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 $83 million, $82 million, and $80 million for the years ended December 31, 2022, 2021, and 2020, respectively.
13. STOCK-BASED COMPENSATION
Overview
Under our 2020 Omnibus Stock Incentive Plan (the 2020 OSIP), various stock and stock-based awards may be granted to employees, non-employee directors, and third-party service providers. The 2020 OSIP permits grants of (i) restricted stock and restricted stock units; (ii) stock options (including incentive and non-qualified stock options); (iii) stock appreciation rights; (iv) performance awards of cash, stock, or other securities; and (v) other stock-based awards (e.g., stock unit awards). Awards under the 2020 OSIP are granted at the discretion of our Human Resources and Compensation Committee, a committee of our Board, and may be subject to vesting or performance periods, performance goals, or other restrictions. The 2020 OSIP was approved by our stockholders on April 30, 2020, and as of such date, any shares of common stock that were available to be awarded under the 2011 Omnibus Stock Incentive Plan (the 2011 OSIP) became available for issuance under the 2020 OSIP and any shares of common stock subject to awards under the 2011 OSIP outstanding as of April 30, 2020, that are subsequently forfeited, terminated, canceled or rescinded, settled in cash in lieu of common stock, exchanged for awards not involving common stock, or expire unexercised also become available for issuance under the 2020 OSIP. No future awards will be made under the 2011 OSIP. As of December 31, 2022, 12,747,181 shares of our common stock remained available to be awarded under the 2020 OSIP.
The following table reflects activity related to our stock-based compensation arrangements (in millions):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Stock-based compensation expense: | | | | | |
| Restricted stock | $ | 67 | | | $ | 65 | | | $ | 63 | |
| Performance awards | 32 | | | 21 | | | 15 | |
| Stock options and other awards | 4 | | | 2 | | | 2 | |
| Total stock-based compensation expense | $ | 103 | | | $ | 88 | | | $ | 80 | |
| Tax benefit recognized on stock-based compensation expense | $ | 15 | | | $ | 13 | | | $ | 13 | |
Tax benefit realized for tax deductions resulting from exercises and vestings | 2 | | | 1 | | | 1 | |
| | | | | |
VALERO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Restricted Stock
Restricted stock is our most significant stock-based compensation arrangement. Employees, non-employee directors, and third-party service providers are eligible to receive restricted stock, which vests in accordance with individual written agreements between the participants and us, usually in equal annual installments over a period of three years beginning one year after the date of grant. The fair value of each share of restricted stock is equal to the market price of our common stock. A summary of the status of our restricted stock awards is presented in the following table:
| | | | | | | | | | | |
|
Number of Shares | | Weighted-
Average
Grant-Date
Fair Value
Per Share |
| Nonvested shares as of January 1, 2022 | 1,458,191 | | | $ | 70.93 | |
| Granted | 575,074 | | | 112.88 | |
| Vested | (835,828) | | | 76.54 | |
| Forfeited | (15,260) | | | 72.52 | |
| Nonvested shares as of December 31, 2022 | 1,182,177 | | | 87.36 | |
As of December 31, 2022, there was $54 million of unrecognized compensation cost related to outstanding unvested restricted stock awards, which is expected to be recognized over a weighted-average period of approximately two years.
The following table reflects activity related to our restricted stock:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Weighted-average grant-date fair value per share of restricted stock granted | $ | 112.88 | | | $ | 77.71 | | | $ | 55.62 | |
| Fair value of restricted stock vested (in millions) | 99 | | | 59 | | | 35 | |
VALERO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. INCOME TAXES
Income Statement Components
Income (loss) before income tax expense (benefit) was as follows (in millions):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| U.S. operations | $ | 11,716 | | | $ | 1,023 | | | $ | (2,072) | |
| Foreign operations | 3,591 | | | 520 | | | 62 | |
| Income (loss) before income tax expense (benefit) | $ | 15,307 | | | $ | 1,543 | | | $ | (2,010) | |
Statutory income tax rates applicable to the countries in which we operate during each of the years ended December 31, 2022, 2021, and 2020 were as follows:
| | | | | |
| U.S. | 21 | % |
| Canada | 15 | % |
| U.K. | 19 | % |
| Ireland | 13 | % |
| Peru | 30 | % |
| Mexico | 30 | % |
The following is a reconciliation of income tax expense (benefit) computed by applying statutory income tax rates to actual income tax expense (benefit) (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. | | Foreign | | Total |
| Amount | | Percent | | Amount | | Percent | | Amount | | Percent |
| Year ended December 31, 2022 | | | | | | | | | | | |
| Income tax expense at statutory rates | $ | 2,460 | | | 21.0 | % | | $ | 611 | | | 17.0 | % | | $ | 3,071 | | | 20.1 | % |
U.S. state and Canadian provincial tax expense, net of federal income tax effect | 182 | | | 1.6 | % | | 255 | | | 7.1 | % | | 437 | | | 2.8 | % |
| Permanent differences | (61) | | | (0.5) | % | | (16) | | | (0.5) | % | | (77) | | | (0.5) | % |
| GILTI tax | 413 | | | 3.5 | % | | — | | | — | | | 413 | | | 2.7 | % |
| Foreign tax credits | (396) | | | (3.4) | % | | — | | | — | | | (396) | | | (2.6) | % |
| Repatriation withholding tax | 51 | | | 0.4 | % | | — | | | — | | | 51 | | | 0.3 | % |
| | | | | | | | | | | |
| | | | | | | | | | | |
Tax effects of income associated with noncontrolling interests | (78) | | | (0.7) | % | | 25 | | | 0.7 | % | | (53) | | | (0.3) | % |
| Other, net | (27) | | | (0.2) | % | | 9 | | | 0.3 | % | | (18) | | | (0.1) | % |
| Income tax expense | $ | 2,544 | | | 21.7 | % | | $ | 884 | | | 24.6 | % | | $ | 3,428 | | | 22.4 | % |
________________________
VALERO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. | | Foreign | | Total |
| Amount | | Percent | | Amount | | Percent | | Amount | | Percent |
| Year ended December 31, 2021 | | | | | | | | | | | |
| Income tax expense at statutory rates | $ | 215 | | | 21.0 | % | | $ | 73 | | | 14.0 | % | | $ | 288 | | | 18.7 | % |
U.S. state and Canadian provincial tax expense, net of federal income tax effect | 16 | | | 1.6 | % | | 53 | | | 10.2 | % | | 69 | | | 4.5 | % |
| Permanent differences | (34) | | | (3.3) | % | | (14) | | | (2.7) | % | | (48) | | | (3.1) | % |
| Changes in tax law (a) | (10) | | | (1.0) | % | | 74 | | | 14.2 | % | | 64 | | | 4.1 | % |
| CARES Act (b) | (56) | | | (5.5) | % | | — | | | — | | | (56) | | | (3.6) | % |
| GILTI tax | 125 | | | 12.2 | % | | — | | | — | | | 125 | | | 8.1 | % |
| | | | | | | | | | | |
| Foreign tax credits | (103) | | | (10.1) | % | | — | | | — | | | (103) | | | (6.7) | % |
| Settlements | (22) | | | (2.1) | % | | — | | | — | | | (22) | | | (1.4) | % |
Tax effects of income associated with noncontrolling interests | (74) | | | (7.2) | % | | 30 | | | 5.8 | % | | (44) | | | (2.9) | % |
| Other, net | (7) | | | (0.7) | % | | (11) | | | (2.1) | % | | (18) | | | (1.2) | % |
| Income tax expense | $ | 50 | | | 4.9 | % | | $ | 205 | | | 39.4 | % | | $ | 255 | | | 16.5 | % |
| | | | | | | | | | | |
| Year ended December 31, 2020 | | | | | | | | | | | |
| Income tax benefit at statutory rates | $ | (435) | | | 21.0 | % | | $ | (10) | | | (16.1) | % | | $ | (445) | | | 22.1 | % |
U.S. state and Canadian provincial tax expense (benefit), net of federal income tax effect | (33) | | | 1.6 | % | | 27 | | | 43.5 | % | | (6) | | | 0.3 | % |
| Permanent differences | (23) | | | 1.1 | % | | 15 | | | 24.2 | % | | (8) | | | 0.4 | % |
| CARES Act (b) | (360) | | | 17.4 | % | | — | | | — | | | (360) | | | 17.9 | % |
| | | | | | | | | | | |
| Lapse of federal statute of limitations | (39) | | | 1.8 | % | | — | | | — | | | (39) | | | 1.9 | % |
| | | | | | | | | | | |
| Change in tax law | — | | | — | % | | 21 | | | 33.9 | % | | 21 | | | (1.0) | % |
Tax effects of income associated with noncontrolling interests | (66) | | | 3.2 | % | | (8) | | | (12.9) | % | | (74) | | | 3.7 | % |
| Other, net | 7 | | | (0.3) | % | | 1 | | | 1.6 | % | | 8 | | | (0.4) | % |
| Income tax expense (benefit) | $ | (949) | | | 45.8 | % | | $ | 46 | | | 74.2 | % | | $ | (903) | | | 44.9 | % |
________________________
(a)During the three months ended June 30, 2021, certain statutory income tax rate changes (primarily an increase in the U.K. rate from 19 percent to 25 percent effective in 2023) were enacted that resulted in the remeasurement of our deferred tax liabilities and related deferred income tax expense.
(b)See “CARES Act” on page 123 for a discussion of significant changes in tax law in the U.S. that were enacted in 2020.
VALERO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Components of income tax expense (benefit) were as follows (in millions):
| | | | | | | | | | | | | | | | | |
| U.S. | | Foreign | | Total |
| Year ended December 31, 2022 | | | | | |
| Current: | | | | | |
| Country | $ | 2,147 | | | $ | 766 | | | $ | 2,913 | |
| U.S. state / Canadian provincial | 153 | | | 312 | | | 465 | |
| Total current | 2,300 | | | 1,078 | | | 3,378 | |
| Deferred: | | | | | |
| Country | 164 | | | (138) | | | 26 | |
| U.S. state / Canadian provincial | 80 | | | (56) | | | 24 | |
| Total deferred | 244 | | | (194) | | | 50 | |
| Income tax expense | $ | 2,544 | | | $ | 884 | | | $ | 3,428 | |
| | | | | |
| Year ended December 31, 2021 | | | | | |
| Current: | | | | | |
| Country | $ | 68 | | | $ | 215 | | | $ | 283 | |
| U.S. state / Canadian provincial | 1 | | | 97 | | | 98 | |
| Total current | 69 | | | 312 | | | 381 | |
| Deferred: | | | | | |
| Country | 5 | | | (63) | | | (58) | |
| U.S. state / Canadian provincial | (24) | | | (44) | | | (68) | |
| Total deferred | (19) | | | (107) | | | (126) | |
| Income tax expense | $ | 50 | | | $ | 205 | | | $ | 255 | |
| | | | | |
| Year ended December 31, 2020 | | | | | |
| Current: | | | | | |
| Country | $ | (1,033) | | | $ | (34) | | | $ | (1,067) | |
| U.S. state / Canadian provincial | 9 | | | (3) | | | 6 | |
| Total current | (1,024) | | | (37) | | | (1,061) | |
| Deferred: | | | | | |
| Country | 126 | | | 53 | | | 179 | |
| U.S. state / Canadian provincial | (51) | | | 30 | | | (21) | |
| Total deferred | 75 | | | 83 | | | 158 | |
| Income tax expense (benefit) | $ | (949) | | | $ | 46 | | | $ | (903) | |
VALERO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Income Taxes Paid (Refunded)
Income taxes paid to (received from) U.S. and foreign taxing authorities were as follows (in millions):
| | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | |
| 2022 | | 2021 | | 2020 | |
| U.S. | $ | 2,396 | | | $ | (878) | | (a) | $ | 130 | | |
| Foreign | 892 | | | 36 | | | 73 | | |
| Income taxes paid (refunded), net | $ | 3,288 | | | $ | (842) | | | $ | 203 | | |
________________________
(a)This amount includes a refund of $962 million that we received related to our U.S. federal income tax return for 2020.
Deferred Income Tax Assets and Liabilities
The tax effects of significant temporary differences representing deferred income tax assets and liabilities were as follows (in millions):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Deferred income tax assets: | | | |
| Tax credit carryforwards | $ | 660 | | | $ | 679 | |
| NOLs | 642 | | | 697 | |
| Inventories | 326 | | | 217 | |
| | | |
| Compensation and employee benefit liabilities | 44 | | | 123 | |
| Environmental liabilities | 57 | | | 53 | |
| Other | 186 | | | 149 | |
| Total deferred income tax assets | 1,915 | | | 1,918 | |
| Valuation allowance | (1,234) | | | (1,262) | |
| Net deferred income tax assets | 681 | | | 656 | |
| | | |
| Deferred income tax liabilities: | | | |
| Property, plant, and equipment | 4,708 | | | 4,866 | |
| Deferred turnaround costs | 369 | | | 308 | |
| Inventories | 234 | | | 191 | |
| Investments | 431 | | | 268 | |
| Other | 156 | | | 233 | |
| Total deferred income tax liabilities | 5,898 | | | 5,866 | |
| Net deferred income tax liabilities | $ | 5,217 | | | $ | 5,210 | |
VALERO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We had the following income tax credit and loss carryforwards as of December 31, 2022 (in millions):
| | | | | | | | | | | |
| Amount | | Expiration |
| U.S. state income tax credits (gross amount) | $ | 73 | | | 2023 through 2033 |
| U.S. state income tax credits (gross amount) | 5 | | | Unlimited |
| U.S. foreign tax credits | 598 | | | 2027 |
| U.S. state income tax NOLs (gross amount) | 12,002 | | | 2023 through 2040 |
| U.S. state income tax NOLs (gross amount) | 390 | | | Unlimited |
| | | |
| Foreign NOLs (gross amount) | 9 | | | Unlimited |
| | | |
We have recorded a valuation allowance as of December 31, 2022 and 2021 due to uncertainties related to our ability to utilize some of our deferred income tax assets associated with our U.S. foreign tax credits, certain U.S. state income tax credits, certain foreign deferred tax assets, and certain NOLs before they expire. The valuation allowance is based on our estimates of future taxable income in the various jurisdictions in which we operate and the period over which deferred income tax assets will be recoverable. The valuation allowance decreased by $28 million in 2022 primarily due to increases in the realizability of assets and NOLs in a foreign jurisdiction.
Unrecognized Tax Benefits
Change in Unrecognized Tax Benefits
The following is a reconciliation of the change in unrecognized tax benefits, excluding related interest and penalties, (in millions):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Balance as of beginning of year | $ | 816 | | | $ | 847 | | | $ | 897 | |
| Additions for tax positions related to the current year | 27 | | | 3 | | | 5 | |
| Additions for tax positions related to prior years | 19 | | | 13 | | | 9 | |
| Reductions for tax positions related to prior years | (573) | | | (25) | | | (20) | |
Reductions for tax positions related to the lapse of applicable statute of limitations | (5) | | | — | | | (44) | |
| Settlements | — | | | (22) | | | — | |
| | | | | |
| Balance as of end of year | $ | 284 | | | $ | 816 | | | $ | 847 | |
Liability for Unrecognized Tax Benefits
The following is a reconciliation of unrecognized tax benefits to our liability for unrecognized tax benefits presented in our balance sheets (in millions).
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Unrecognized tax benefits | $ | 284 | | | $ | 816 | |
| Tax refund claims not yet filed but that we intend to file | — | | | (28) | |
| Interest and penalties | 105 | | | 86 | |
| Liability for unrecognized tax benefits presented in our balance sheets | $ | 389 | | | $ | 874 | |
VALERO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Our liability for unrecognized tax benefits is reflected in the following balance sheet line items (in millions):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Deferred charges and other assets, net | $ | (26) | | | $ | — | |
| Income taxes payable | 169 | | | 1 | |
| Other long-term liabilities | 239 | | | 863 | |
| Deferred tax liabilities | 7 | | | 10 | |
| Liability for unrecognized tax benefits presented in our balance sheets | $ | 389 | | | $ | 874 | |
As of December 31, 2021, our liability for unrecognized tax benefits included $525 million of refund claims associated with taxes paid on incentive payments received from the U.S. federal government for blending biofuels into petroleum-based transportation fuels. We recorded a tax refund receivable of $525 million in connection with our refund claims, but we also recorded a liability for unrecognized tax benefits of $525 million due to the complexity of this matter and uncertainties with respect to sustaining these refund claims. In December 2022, we withdrew our lawsuit regarding this matter. Our financial position, results of operations, and liquidity were not impacted by this withdrawal.
As of December 31, 2022 and 2021, there was $190 million and $708 million, respectively, of unrecognized tax benefits that if recognized would reduce our annual effective tax rate.
During the next 12 months, it is reasonably possible that our tax audit resolutions could reduce our liability for unrecognized tax benefits, excluding interest, by approximately $112 million either because our tax positions are sustained upon audit or because we agree to their disallowance. We do not expect these reductions to have a material impact on our financial statements because such reductions would not materially affect our annual effective tax rate.
Tax Returns Under Audit
U.S. Federal
As of December 31, 2022, our U.S. federal income tax returns for 2012 through 2015, 2017, and 2018 were under audit by the Internal Revenue Service (IRS). The IRS has proposed adjustments for certain open years and we are currently contesting the proposed adjustments with the Office of Appeals of the IRS. We continue to work with the IRS to resolve these matters and we believe that they will be resolved for amounts consistent with our recorded amounts of unrecognized tax benefits associated with these matters.
U.S. State
In 2021, we settled the audits related to our California tax returns for 2004 through 2006. We did not have a significant change to our liability for unrecognized tax benefits upon settlement of the audits. As of December 31, 2022, our California tax returns for 2007 and 2011 through 2019 were under audit by the state of California. We do not expect the ultimate disposition of these audits will result in a material change to our financial condition, results of operations, and liquidity. We believe these audits will be resolved for amounts consistent with our recorded amounts for unrecognized tax benefits associated with these audits.
VALERO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Foreign
As of December 31, 2022, certain of our Canadian subsidiaries’ federal tax returns for 2013 through 2018 were under audit by the Canada Revenue Agency and our Quebec provincial tax returns for 2013 through 2018 were under audit by Revenue Quebec. Also, we are protesting proposed adjustments related to our Peruvian subsidiary’s federal tax return for 2018, which is under audit by La Superintendencia Nacional de Aduanas y de Administración Tributaria. As of December 31, 2022, the 2020 tax return for one of our Mexican subsidiaries was under audit by Servicio de Administración Tributaria, and we are protesting proposed adjustments for this tax return. We do not expect the ultimate disposition of these audits or inquiries will result in a material change to our financial condition, results of operations, and liquidity.
CARES Act
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act was enacted, which resulted in significant changes to the U.S. Internal Revenue Code of 1986, as amended (the Code). The most significant changes affecting us were as follows:
•Modification of the limitations previously set by the Tax Cuts and Jobs Act of 2017 by providing that tax NOLs arising in a tax year beginning in 2018, 2019, or 2020 can be carried back five years. This provision allows the taxpayer to recover taxes previously paid at a 35 percent federal income tax rate during tax years prior to 2018. In addition, the CARES Act removed the taxable income limitation to allow a tax NOL to fully offset taxable income for tax years beginning before January 1, 2021.
•Increased the deductibility of interest expense from 30 percent to 50 percent of adjusted taxable income for 2019 and 2020. Also, a taxpayer can elect to use its 2019 adjusted taxable income in 2020 to determine the deductible amount of interest expense in that year.
Our income tax benefit for the year ended December 31, 2020 included a tax benefit of $360 million attributable to the tax NOL carryback provided under the CARES Act for our 2020 tax NOL to our 2015 tax year in which we paid federal income taxes at a 35 percent tax rate. Upon filing our superseding 2020 federal income tax return in the fourth quarter of 2021, we recorded an additional tax benefit of $56 million during the year ended December 31, 2021 related to the additional 2020 tax NOL carryback to 2015.
Other Disclosures
Undistributed Earnings of Foreign Subsidiaries
As of December 31, 2022, the cumulative undistributed earnings of our foreign subsidiaries that is considered permanently reinvested in the relevant foreign countries were $7.6 billion. This amount excludes $1 billion of earnings that are no longer considered permanently reinvested. We are able to distribute cash via a dividend from our foreign subsidiaries with a full dividend received deduction in the U.S. However, there is a cost to repatriate the undistributed earnings of certain of our foreign subsidiaries to us, including, but not limited to, withholding taxes imposed by certain foreign jurisdictions, U.S. state income taxes, and U.S. federal income tax on foreign exchange gains. We have accrued $51 million of withholding and other taxes on the $1 billion of earnings previously noted, but it is not practicable to estimate the amount of additional tax that would be payable on the undistributed earnings that are considered permanently reinvested.
VALERO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Our repatriation tax liability relates to our recognition of a one-time transition tax on the deemed repatriation of previously undistributed accumulated earnings and profits of our foreign subsidiaries and is included in other long-term liabilities (see Note 7). This transition tax will be remitted to the IRS over the eight-year period provided in the Code, with annual installments through 2025.
Interest and Penalties
Interest and penalties incurred during the years ended December 31, 2022, 2021, and 2020 were not material.
15. EARNINGS (LOSS) PER COMMON SHARE
Earnings (loss) per common share was computed as follows (dollars and shares in millions, except per share amounts):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Earnings (loss) per common share: | | | | | |
| Net income (loss) attributable to Valero stockholders | $ | 11,528 | | | $ | 930 | | | $ | (1,421) | |
| Less: Income allocated to participating securities | 43 | | | 6 | | | 5 | |
| Net income (loss) available to common stockholders | $ | 11,485 | | | $ | 924 | | | $ | (1,426) | |
| | | | | |
| Weighted-average common shares outstanding | 395 | | | 407 | | | 407 | |
| | | | | |
| Earnings (loss) per common share | $ | 29.05 | | | $ | 2.27 | | | $ | (3.50) | |
| | | | | |
| Earnings (loss) per common share – assuming dilution: | | | | | |
| Net income (loss) attributable to Valero stockholders | $ | 11,528 | | | $ | 930 | | | $ | (1,421) | |
Less: Income allocated to participating securities | 43 | | | 6 | | | 5 | |
| Net income (loss) available to common stockholders | $ | 11,485 | | | $ | 924 | | | $ | (1,426) | |
| | | | | |
Weighted-average common shares outstanding | 395 | | | 407 | | | 407 | |
Effect of dilutive securities | 1 | | | — | | | — | |
Weighted-average common shares outstanding – assuming dilution | 396 | | | 407 | | | 407 | |
| | | | | |
| Earnings (loss) per common share – assuming dilution | $ | 29.04 | | | $ | 2.27 | | | $ | (3.50) | |
Participating securities include restricted stock and performance awards granted under our 2020 OSIP or our 2011 OSIP. Dilutive securities include participating securities as well as outstanding stock options.
VALERO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. REVENUES AND SEGMENT INFORMATION
Revenue from Contracts with Customers
Disaggregation of Revenue
Revenue is presented in the table below under “Segment Information” disaggregated by product because this is the level of disaggregation that management has determined to be beneficial to users of our financial statements.
Contract Balances
Contract balances were as follows (in millions):
| | | | | | | | | | | | | |
| December 31, | | |
| 2022 | | 2021 | | |
Receivables from contracts with customers (see Note 2) | $ | 7,189 | | | $ | 6,228 | | | |
Contract liabilities, included in accrued expenses (see Note 7) | 129 | | | 78 | | | |
During the years ended December 31, 2022, 2021, and 2020, we recognized as revenue $76 million, $47 million, and $50 million, respectively, that was included in contract liabilities as of December 31, 2021, 2020, and 2019, respectively.
Remaining Performance Obligations
We have spot and term contracts with customers, the majority of which are spot contracts with no remaining performance obligations. We do not disclose remaining performance obligations for contracts that have terms of one year or less. The transaction price for our remaining term contracts includes a fixed component and variable consideration (i.e., a commodity price), both of which are allocated entirely to a wholly unsatisfied promise to transfer a distinct good that forms part of a single performance obligation. The fixed component is not material and the variable consideration is highly uncertain. Therefore, as of December 31, 2022, we have not disclosed the aggregate amount of the transaction price allocated to our remaining performance obligations.
Segment Information
We have three reportable segments — Refining, Renewable Diesel, and Ethanol. Each segment is a strategic business unit that offers different products and services by employing unique technologies and marketing strategies and whose operations and operating performance are managed and evaluated separately. Operating performance is measured based on the operating income generated by the segment, which includes revenues and expenses that are directly attributable to the management of the respective segment. Intersegment sales are generally derived from transactions made at prevailing market rates. The following is a description of each segment’s business operations.
•The Refining segment includes the operations of our petroleum refineries, the associated activities to market our refined petroleum products, and the logistics assets that support our refining operations. The principal products manufactured by our refineries and sold by this segment include gasolines and blendstocks, distillates, and other products.
•The Renewable Diesel segment represents the operations of DGD, a consolidated joint venture as discussed in Note 11, and the associated activities to market renewable diesel and renewable
VALERO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
naphtha. The principal products manufactured by DGD and sold by this segment are renewable diesel and renewable naphtha. This segment sells some renewable diesel to the Refining segment, which is then sold to that segment’s customers.
•The Ethanol segment includes the operations of our ethanol plants and the associated activities to market our ethanol and co-products. The principal products manufactured by our ethanol plants are ethanol and distillers grains. This segment sells some ethanol to the Refining segment for blending into gasoline, which is sold to that segment’s customers as a finished gasoline product.
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 (loss) and total expenditures for long-lived assets by reportable segment (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Refining | | Renewable
Diesel | | Ethanol | | Corporate
and
Eliminations | | Total |
| Year ended December 31, 2022 | | | | | | | | | |
| Revenues: | | | | | | | | | |
| Revenues from external customers | $ | 168,154 | | | $ | 3,483 | | | $ | 4,746 | | | $ | — | | | $ | 176,383 | |
| Intersegment revenues | 56 | | | 2,018 | | | 740 | | | (2,814) | | | — | |
| Total revenues | 168,210 | | | 5,501 | | | 5,486 | | | (2,814) | | | 176,383 | |
| Cost of sales: | | | | | | | | | |
| Cost of materials and other (a) | 144,588 | | | 4,350 | | | 4,628 | | | (2,796) | | | 150,770 | |
| | | | | | | | | |
Operating expenses (excluding depreciation and amortization expense reflected below) | 5,509 | | | 255 | | | 625 | | | — | | | 6,389 | |
| Depreciation and amortization expense | 2,247 | | | 122 | | | 59 | | | — | | | 2,428 | |
| Total cost of sales | 152,344 | | | 4,727 | | | 5,312 | | | (2,796) | | | 159,587 | |
| Asset impairment loss | — | | | — | | | 61 | | | — | | | 61 | |
| Other operating expenses | 63 | | | — | | | 3 | | | — | | | 66 | |
General and administrative expenses (excluding depreciation and amortization expense reflected below) | — | | | — | | | — | | | 934 | | | 934 | |
| Depreciation and amortization expense | — | | | — | | | — | | | 45 | | | 45 | |
| Operating income by segment | $ | 15,803 | | | $ | 774 | | | $ | 110 | | | $ | (997) | | | $ | 15,690 | |
| | | | | | | | | |
| Total expenditures for long-lived assets (b) | $ | 1,763 | | | $ | 879 | | | $ | 22 | | | $ | 73 | | | $ | 2,737 | |
________________________
VALERO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Refining | | Renewable
Diesel | | Ethanol | | Corporate
and
Eliminations | | Total |
| Year ended December 31, 2021 | | | | | | | | | |
| Revenues: | | | | | | | | | |
| Revenues from external customers | $ | 106,947 | | | $ | 1,874 | | | $ | 5,156 | | | $ | — | | | $ | 113,977 | |
| Intersegment revenues | 14 | | | 468 | | | 433 | | | (915) | | | — | |
| Total revenues | 106,961 | | | 2,342 | | | 5,589 | | | (915) | | | 113,977 | |
| Cost of sales: | | | | | | | | | |
| Cost of materials and other (a) | 97,759 | | | 1,438 | | | 4,428 | | | (911) | | | 102,714 | |
| | | | | | | | | |
Operating expenses (excluding depreciation and amortization expense reflected below) | 5,088 | | | 134 | | | 556 | | | (2) | | | 5,776 | |
| Depreciation and amortization expense | 2,169 | | | 58 | | | 131 | | | — | | | 2,358 | |
| Total cost of sales | 105,016 | | | 1,630 | | | 5,115 | | | (913) | | | 110,848 | |
| Other operating expenses | 83 | | | 3 | | | 1 | | | — | | | 87 | |
General and administrative expenses (excluding depreciation and amortization expense reflected below) | — | | | — | | | — | | | 865 | | | 865 | |
| Depreciation and amortization expense | — | | | — | | | — | | | 47 | | | 47 | |
| | | | | | | | | |
| Operating income by segment | $ | 1,862 | | | $ | 709 | | | $ | 473 | | | $ | (914) | | | $ | 2,130 | |
| | | | | | | | | |
| Total expenditures for long-lived assets (b) | $ | 1,374 | | | $ | 1,049 | | | $ | 18 | | | $ | 17 | | | $ | 2,458 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
| Year ended December 31, 2020 | | | | | | | | | |
| Revenues: | | | | | | | | | |
| Revenues from external customers | $ | 60,840 | | | $ | 1,055 | | | $ | 3,017 | | | $ | — | | | $ | 64,912 | |
| Intersegment revenues | 8 | | | 212 | | | 226 | | | (446) | | | — | |
| Total revenues | 60,848 | | | 1,267 | | | 3,243 | | | (446) | | | 64,912 | |
| Cost of sales: | | | | | | | | | |
| Cost of materials and other (a) | 56,093 | | | 500 | | | 2,784 | | | (444) | | | 58,933 | |
| LCM inventory valuation adjustment | (19) | | | — | | | — | | | — | | | (19) | |
Operating expenses (excluding depreciation and amortization expense reflected below) | 3,944 | | | 85 | | | 406 | | | — | | | 4,435 | |
| Depreciation and amortization expense | 2,138 | | | 44 | | | 121 | | | — | | | 2,303 | |
| Total cost of sales | 62,156 | | | 629 | | | 3,311 | | | (444) | | | 65,652 | |
| Other operating expenses | 34 | | | — | | | 1 | | | — | | | 35 | |
General and administrative expenses (excluding depreciation and amortization expense reflected below) | — | | | — | | | — | | | 756 | | | 756 | |
| Depreciation and amortization expense | — | | | — | | | — | | | 48 | | | 48 | |
| | | | | | | | | |
| Operating income (loss) by segment | $ | (1,342) | | | $ | 638 | | | $ | (69) | | | $ | (806) | | | $ | (1,579) | |
| | | | | | | | | |
| Total expenditures for long-lived assets (b) | $ | 1,838 | | | $ | 548 | | | $ | 23 | | | $ | 27 | | | $ | 2,436 | |
______________________________________________________
(a)Cost of materials and other for our Renewable Diesel segment is net of the blender’s tax credit on qualified fuel mixtures of $761 million, $371 million, and $288 million for the years ended December 31, 2022, 2021, and 2020, respectively.
(b)Total expenditures for long-lived assets includes amounts related to capital expenditures; deferred turnaround and catalyst costs; and property, plant, and equipment for acquisitions.
VALERO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table provides a disaggregation of revenues from external customers for our principal products by reportable segment (in millions):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Refining: | | | | | |
| Gasolines and blendstocks | $ | 70,496 | | | $ | 49,534 | | | $ | 26,278 | |
| Distillates | 82,521 | | | 45,939 | | | 28,234 | |
| Other product revenues | 15,137 | | | 11,474 | | | 6,328 | |
| Total Refining revenues | 168,154 | | | 106,947 | | | 60,840 | |
| Renewable Diesel: | | | | | |
| Renewable diesel | 3,333 | | | 1,874 | | | 1,055 | |
| Renewable naphtha | 150 | | | — | | | — | |
| Total Renewable Diesel revenues | 3,483 | | | 1,874 | | | 1,055 | |
| Ethanol: | | | | | |
| Ethanol | 3,653 | | | 4,122 | | | 2,353 | |
| Distillers grains | 1,093 | | | 1,034 | | | 664 | |
| Total Ethanol revenues | 4,746 | | | 5,156 | | | 3,017 | |
| | | | | |
| | | | | |
| Revenues | $ | 176,383 | | | $ | 113,977 | | | $ | 64,912 | |
Revenues by geographic area are shown in the following table (in millions). The geographic area is based on location of customer and no customer accounted for 10 percent or more of our revenues.
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| U.S. | $ | 126,722 | | | $ | 82,940 | | | $ | 45,174 | |
| Canada | 11,743 | | | 6,597 | | | 4,294 | |
| U.K. and Ireland | 17,822 | | | 13,307 | | | 9,268 | |
| Other countries | 20,096 | | | 11,133 | | | 6,176 | |
| Revenues | $ | 176,383 | | | $ | 113,977 | | | $ | 64,912 | |
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, |
| 2022 | | 2021 |
| U.S. | $ | 29,378 | | | $ | 28,518 | |
| Canada | 1,634 | | | 1,855 | |
| U.K. and Ireland | 1,301 | | | 1,528 | |
| Mexico and Peru | 860 | | | 859 | |
| Total long-lived assets | $ | 33,173 | | | $ | 32,760 | |
VALERO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Total assets by reportable segment were as follows (in millions):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Refining | $ | 48,484 | | | $ | 47,365 | |
| Renewable Diesel | 5,217 | | | 3,437 | |
| Ethanol | 1,551 | | | 1,812 | |
| Corporate and eliminations | 5,730 | | | 5,274 | |
| Total assets | $ | 60,982 | | | $ | 57,888 | |
As of December 31, 2022 and 2021, our investments in nonconsolidated joint ventures accounted for under the equity method were $724 million and $734 million, respectively, all of which related to the Refining segment and are reflected in “deferred charges and other assets, net” as presented in Note 6.
17. SUPPLEMENTAL CASH FLOW INFORMATION
In order to determine net cash provided by operating activities, net income (loss) is adjusted by, among other things, changes in current assets and current liabilities as follows (in millions):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Decrease (increase) in current assets: | | | | | |
| Receivables, net | $ | (1,619) | | | $ | (4,382) | | | $ | 2,773 | |
| Inventories | (672) | | | (253) | | | 1,007 | |
| | | | | |
| Prepaid expenses and other | (180) | | | (22) | | | 101 | |
| Increase (decrease) in current liabilities: | | | | | |
| Accounts payable | 521 | | | 6,301 | | | (4,068) | |
| Accrued expenses | (5) | | | 253 | | | 48 | |
| Taxes other than income taxes payable | 98 | | | 104 | | | 37 | |
| Income taxes payable | 231 | | | 224 | | | (243) | |
| Changes in current assets and current liabilities | $ | (1,626) | | | $ | 2,225 | | | $ | (345) | |
Changes in current assets and current liabilities for the year ended December 31, 2022 were primarily due to the following:
•The increase in receivables was primarily due to an increase in refined petroleum product prices in December 2022 compared to December 2021;
•The increase in inventories was primarily due to an increase in inventory volumes associated with the DGD Port Arthur Plant, which commenced operations in the fourth quarter; and
•The increase in accounts payable was primarily due to an increase in feedstock volumes purchased for the start-up of the DGD Port Arthur Plant in December 2022 compared to December 2021.
VALERO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Changes in current assets and current liabilities for the year ended December 31, 2021 were primarily due to the following:
•The increase in receivables was primarily due to an increase in refined petroleum product prices in December 2021 compared to December 2020 combined with an increase in refined petroleum product sales volumes, partially offset by a decrease in income taxes receivable associated with the receipt of a $962 million refund related to our U.S. federal income tax return for 2020; and
•The increase in accounts payable was primarily due to an increase in crude oil and other feedstock prices in December 2021 compared to December 2020 combined with an increase in crude oil and other feedstock volumes purchased.
Changes in current assets and current liabilities for the year ended December 31, 2020 were primarily due to the following:
•The decrease in receivables was due to (i) a decrease of $3.3 billion as a result of a decrease in sales volumes combined with a decrease in the prices of our products in December 2020 compared to December 2019 and (ii) the collection of $449 million for a blender’s tax credit receivable attributable to volumes blended during 2019 and 2018, partially offset by an increase in income taxes receivable of $1.0 billion primarily due to the recognition of a current income tax benefit;
•The decrease in inventories was primarily due to a reduction of higher-cost inventory volumes in our Refining segment in December 2020 compared to December 2019; and
•The decrease in accounts payable was due to a decrease in crude oil and other feedstock volumes purchased combined with a decrease in crude oil and other feedstock prices in December 2020 compared to December 2019.
Cash flows related to interest and income taxes were as follows (in millions):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Interest paid in excess of amount capitalized, including interest on finance leases | $ | 570 | | | $ | 598 | | | $ | 526 | |
Income taxes paid (refunded), net (see Note 14) | 3,288 | | | (842) | | | 203 | |
VALERO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Supplemental cash flow information related to our operating and finance leases was as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Operating
Leases | | Finance
Leases | | Operating
Leases | | Finance
Leases | | Operating
Leases | | Finance
Leases |
Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | | | | | |
| Operating cash flows | $ | 395 | | | $ | 83 | | | $ | 397 | | | $ | 72 | | | $ | 444 | | | $ | 97 | |
| Investing cash flows | — | | | — | | | 1 | | | — | | | 1 | | | — | |
| Financing cash flows | — | | | 180 | | | — | | | 135 | | | — | | | 80 | |
Changes in lease balances resulting from new and modified leases (a) | 178 | | | 660 | | | 451 | | | 378 | | | 263 | | | 950 | |
________________________
(a)Noncash activity for the year ended December 31, 2022 primarily included approximately $500 million for a finance lease ROU asset and related liability recognized in connection with the completion of the DGD Port Arthur Plant described in Note 4.
Noncash activity for the year ended December 31, 2020 primarily included approximately $800 million for a finance lease ROU asset and related liability recognized in connection with the terminaling agreement with MVP. Upon completion of construction of the MVP Terminal in the first quarter of 2020, we recognized a finance lease ROU asset and related liability of approximately $1.4 billion in connection with the terminaling agreement with MVP to utilize the MVP Terminal for an initial term of 12 years and renewal option periods. In the fourth quarter of 2020 in connection with our review of certain of our logistics investments, including MVP, we notified MVP that we would not renew the terminaling agreement after its initial noncancelable term. Consequently, we derecognized approximately $600 million of the finance lease liability and related ROU asset, which were noncash financing and investing activities, respectively.
There were no significant noncash investing and financing activities during the years ended December 31, 2022, 2021, and 2020, except as noted in the table above.
VALERO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
18. FAIR VALUE MEASUREMENTS
General
GAAP requires or permits certain assets and liabilities to be measured at fair value on a recurring or nonrecurring basis in our balance sheets, and those assets and liabilities are presented below under “Recurring Fair Value Measurements” and “Nonrecurring Fair Value Measurements.” Assets and liabilities measured at fair value on a recurring basis, such as derivative financial instruments, are measured at fair value at the end of each reporting period. Assets and liabilities measured at fair value on a nonrecurring basis, such as the impairment of property, plant and equipment, are measured at fair value in particular circumstances.
GAAP also requires the disclosure of the fair values of financial instruments when an option to elect fair value accounting has been provided, but such election has not been made. A debt obligation is an example of such a financial instrument. The disclosure of the fair values of financial instruments not recognized at fair value in our balance sheet is presented below under “Other Financial Instruments.”
GAAP provides a framework for measuring fair value and establishes a three-level fair value hierarchy that prioritizes inputs to valuation techniques based on the degree to which objective prices in external active markets are available to measure fair value. The following is a description of each of the levels of the fair value hierarchy.
•Level 1 - Observable inputs, such as unadjusted quoted prices in active markets for identical assets or liabilities.
•Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
•Level 3 - Unobservable inputs for the asset or liability. Unobservable inputs reflect our own assumptions about what market participants would use to price the asset or liability. The inputs are developed based on the best information available in the circumstances, which might include occasional market quotes or sales of similar instruments or our own financial data such as internally developed pricing models, discounted cash flow methodologies, as well as instruments for which the fair value determination requires significant judgment.
VALERO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Recurring Fair Value Measurements
The following tables present information (in millions) about our assets and liabilities recognized at their fair values in our balance sheets categorized according to the fair value hierarchy of the inputs utilized by us to determine the fair values as of December 31, 2022 and 2021.
We have elected to offset the fair value amounts recognized for multiple similar derivative contracts executed with the same counterparty, including any related cash collateral assets or obligations as shown below; however, fair value amounts by hierarchy level are presented in the following tables on a gross basis. We have no derivative contracts that are subject to master netting arrangements that are reflected gross on the balance sheet.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| | | | | | | Total
Gross
Fair
Value | | Effect of
Counter-
party
Netting | | Effect of
Cash
Collateral
Netting | | Net
Carrying
Value on
Balance
Sheet | | Cash
Collateral
Paid or
Received
Not Offset |
| Fair Value Hierarchy | | | | | |
| Level 1 | | Level 2 | | Level 3 | | | | | |
| Assets | | | | | | | | | | | | | | | |
Commodity derivative contracts | $ | 830 | | | $ | — | | | $ | — | | | $ | 830 | | | $ | (705) | | | $ | (8) | | | $ | 117 | | | $ | — | |
Physical purchase contracts | — | | | 4 | | | — | | | 4 | | | n/a | | n/a | | 4 | | | n/a |
| | | | | | | | | | | | | | | |
Investments of certain benefit plans | 72 | | | — | | | 6 | | | 78 | | | n/a | | n/a | | 78 | | | n/a |
Investments in AFS debt securities | 56 | | | 165 | | | — | | | 221 | | | n/a | | n/a | | 221 | | | n/a |
Total | $ | 958 | | | $ | 169 | | | $ | 6 | | | $ | 1,133 | | | $ | (705) | | | $ | (8) | | | $ | 420 | | | |
| | | | | | | | | | | | | | | |
| Liabilities | | | | | | | | | | | | | | | |
Commodity derivative contracts | $ | 705 | | | $ | — | | | $ | — | | | $ | 705 | | | $ | (705) | | | $ | — | | | $ | — | | | $ | (149) | |
Blending program obligations | — | | | 55 | | | — | | | 55 | | | n/a | | n/a | | 55 | | | n/a |
Physical purchase contracts | — | | | 4 | | | — | | | 4 | | | n/a | | n/a | | 4 | | | n/a |
Foreign currency contracts | 2 | | | — | | | — | | | 2 | | | n/a | | n/a | | 2 | | | n/a |
| | | | | | | | | | | | | | | |
Total | $ | 707 | | | $ | 59 | | | $ | — | | | $ | 766 | | | $ | (705) | | | $ | — | | | $ | 61 | | | |
VALERO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| | | Total
Gross
Fair
Value | | Effect of
Counter-
party
Netting | | Effect of
Cash
Collateral
Netting | | Net
Carrying
Value on
Balance
Sheet | | Cash
Collateral
Paid or
Received
Not Offset |
| Fair Value Hierarchy | | | | |
| Level 1 | | Level 2 | | Level 3 | | | | |
| Assets | | | | | | | | | | | | | | | |
Commodity derivative contracts | $ | 522 | | | $ | — | | | $ | — | | | $ | 522 | | | $ | (444) | | | $ | (15) | | | $ | 63 | | | $ | — | |
Physical purchase contracts | — | | | 4 | | | — | | | 4 | | | n/a | | n/a | | 4 | | | n/a |
Foreign currency contracts | 1 | | | — | | | — | | | 1 | | | n/a | | n/a | | 1 | | | n/a |
Investments of certain benefit plans | 83 | | | — | | | 6 | | | 89 | | | n/a | | n/a | | 89 | | | n/a |
| | | | | | | | | | | | | | | |
Total | $ | 606 | | | $ | 4 | | | $ | 6 | | | $ | 616 | | | $ | (444) | | | $ | (15) | | | $ | 157 | | | |
| | | | | | | | | | | | | | | |
| Liabilities | | | | | | | | | | | | | | | |
Commodity derivative contracts | $ | 472 | | | $ | — | | | $ | — | | | $ | 472 | | | $ | (444) | | | $ | (28) | | | $ | — | | | $ | (41) | |
Blending program obligations | — | | | 57 | | | — | | | 57 | | | n/a | | n/a | | 57 | | | n/a |
Physical purchase contracts | — | | | 5 | | | — | | | 5 | | | n/a | | n/a | | 5 | | | n/a |
Foreign currency contracts | 10 | | | — | | | — | | | 10 | | | n/a | | n/a | | 10 | | | n/a |
Total | $ | 482 | | | $ | 62 | | | $ | — | | | $ | 544 | | | $ | (444) | | | $ | (28) | | | $ | 72 | | | |
A description of our assets and liabilities recognized at fair value along with the valuation methods and inputs we used to develop their fair value measurements are as follows:
•Commodity derivative contracts consist primarily of exchange-traded futures, which are used to reduce the impact of price volatility on our results of operations and cash flows as discussed in Note 19. These contracts are measured at fair value using a market approach based on quoted prices from the commodity exchange and are categorized 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 purchase contracts are measured using a market approach based on quoted prices from the commodity exchange or an independent pricing service and are categorized in Level 2 of the fair value hierarchy.
•Investments of certain benefit plans consist of investment securities held by trusts for the purpose of satisfying a portion of our obligations under certain U.S. nonqualified benefit plans. The plan assets categorized in Level 1 of the fair value hierarchy are measured at fair value using a market approach based on quoted prices from national securities exchanges. The plan assets categorized in Level 3 of the fair value hierarchy represent insurance contracts, the fair value of which is provided by the insurer.
VALERO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
•Investments in AFS debt securities consist primarily of commercial paper and U.S. government treasury bills and have maturities within one year. As of December 31, 2022, the securities reflected as cash and cash equivalents and prepaid expenses and other were $125 million and $96 million, respectively, depending on their original maturities when acquired. The securities categorized in Level 1 are measured at fair value using a market approach based on quoted prices from national securities exchanges, and the securities categorized in Level 2 are measured at fair value using a market approach based on quoted prices from independent pricing services. The amortized cost basis of the securities approximates fair value. Unrealized gains and losses and realized gains and losses were de minimis. There were no AFS debt securities held as of December 31, 2021.
•Blending program obligations represent our liability for the purchase of compliance credits needed to satisfy our blending obligations under the Renewable and Low-Carbon Fuel Programs. The blending program obligations are categorized in Level 2 of the fair value hierarchy and are measured at fair value using a market approach based on quoted prices from an independent pricing service.
•Foreign currency contracts consist of foreign currency exchange and purchase contracts and foreign currency swap agreements related to our foreign operations to manage our exposure to exchange rate fluctuations on transactions denominated in currencies other than the local (functional) currencies of our operations. These contracts are valued based on quoted foreign currency exchange rates and are categorized in Level 1 of the fair value hierarchy.
Nonrecurring Fair Value Measurements
As discussed in Note 5, we concluded that our Lakota ethanol plant was impaired as of December 31, 2022, which resulted in an asset impairment loss of $61 million. The fair value of the Lakota ethanol plant was determined using a combination of the income and market approaches and was classified in Level 3. We employed a probability-weighted approach to possible future cash flow scenarios, including the use of peer company metrics and comparison to a recent sales transaction.
There were no assets or liabilities that were measured at fair value on a nonrecurring basis as of December 31, 2022 and 2021, except as noted above.
Other Financial Instruments
Financial instruments that we recognize in our balance sheets at their carrying amounts are shown in the following table along with their associated fair values (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2022 | | December 31, 2021 |
| Fair Value
Hierarchy | | Carrying
Amount | | Fair
Value | | Carrying
Amount | | Fair
Value |
| Financial assets: | | | | | | | | | |
| Cash and cash equivalents | Level 1 | | $ | 4,862 | | | $ | 4,862 | | | $ | 4,122 | | | $ | 4,122 | |
| Financial liabilities: | | | | | | | | | |
Debt (excluding finance lease obligations) | Level 2 | | 9,241 | | | 8,902 | | | 11,950 | | | 13,668 | |
VALERO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
19. PRICE RISK MANAGEMENT ACTIVITIES
General
We are exposed to market risks primarily related to the volatility in the price of commodities, foreign currency exchange rates, and the price of credits needed to comply with the Renewable and Low-Carbon Fuel Programs. We enter into derivative instruments to manage some of these risks, including derivative instruments related to the various commodities we purchase or produce, and foreign currency exchange and purchase contracts, as described below under “Risk Management Activities by Type of Risk.” These derivative instruments are recorded as either assets or liabilities measured at their fair values (see Note 18), as summarized below under “Fair Values of Derivative Instruments.” The effect of these derivative instruments on our income and other comprehensive income (loss) is summarized below under “Effect of Derivative Instruments on Income and Other Comprehensive Income (Loss).”
Risk Management Activities by Type of Risk
Commodity Price Risk
We are exposed to market risks related to the volatility in the price of feedstocks (primarily crude oil, waste and renewable feedstocks, and corn), the products we produce, and natural gas used in our operations. To reduce the impact of price volatility on our results of operations and cash flows, we use commodity derivative instruments, such as futures and options. Our positions in commodity derivative instruments are monitored and managed on a daily basis by our risk control group to ensure compliance with our stated risk management policy that has been approved by our Board.
We primarily use commodity derivative instruments as cash flow hedges and economic hedges. Our objectives for entering into each type of hedge is described below.
•Cash flow hedges – The objective of our cash flow hedges is to lock in the price of forecasted purchases and/or product sales at existing market prices that we deem favorable.
•Economic hedges – Our objectives for holding economic hedges are to (i) manage price volatility in certain feedstock and product inventories and (ii) lock in the price of forecasted purchases and/or product sales at existing market prices that we deem favorable.
VALERO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31, 2022, we had the following outstanding commodity derivative instruments that were used as cash flow hedges and economic hedges, as well as commodity derivative instruments related to the physical purchase of corn at a fixed price. The information presents the notional volume of outstanding contracts by type of instrument and year of maturity (volumes in thousands of barrels, except corn contracts that are presented in thousands of bushels).
| | | | | | | | | | | | |
| | Notional Contract Volumes by
Year of Maturity | | |
| | 2023 | | | | |
| Derivatives designated as cash flow hedges: | | | | | | |
| Refined petroleum products: | | | | | | |
| Futures – long | | 2,929 | | | | | |
| Futures – short | | 7,589 | | | | | |
| | | | | | |
| Derivatives designated as economic hedges: | | | | | | |
| Crude oil and refined petroleum products: | | | | | | |
| | | | | | |
| | | | | | |
| Futures – long | | 73,415 | | | | | |
| Futures – short | | 68,973 | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Corn: | | | | | | |
| Futures – long | | 46,820 | | | | | |
| Futures – short | | 92,830 | | | | | |
| Physical contracts – long | | 42,223 | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Foreign Currency Risk
We are exposed to exchange rate fluctuations on transactions related to our foreign operations that are denominated in currencies other than the local (functional) currencies of our operations. To manage our exposure to these exchange rate fluctuations, we often use foreign currency contracts. These contracts are not designated as hedging instruments for accounting purposes and therefore are classified as economic hedges. As of December 31, 2022, we had foreign currency contracts to purchase $610 million of U.S. dollars. These commitments matured on or before January 25, 2023.
Renewable and Low-Carbon Fuel Programs Price Risk
We are exposed to market risk related to the volatility in the price of credits needed to comply with the Renewable and Low-Carbon Fuel Programs. To manage this risk, we enter into contracts to purchase these credits. Some of these contracts are derivative instruments; however, we elect the normal purchase exception and do not record these contracts at their fair values. The Renewable and Low-Carbon Fuel Programs require us to blend a certain volume of renewable and low-carbon fuels into the petroleum-based transportation fuels we produce in, or import into, the respective jurisdiction to be consumed therein based on annual quotas. To the degree we are unable to blend at the required quotas, we must purchase compliance credits (primarily RINs). For the years ended December 31, 2022, 2021, and 2020, the cost of meeting our credit obligations under the Renewable and Low-Carbon Fuel Programs was $1.5 billion, $2.1 billion, and $767 million, respectively, which are reflected in cost of materials and other.
VALERO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fair Values of Derivative Instruments
The following table provides information about the fair values of our derivative instruments as of December 31, 2022 and 2021 (in millions) and the line items in the balance sheets in which the fair values are reflected. See Note 18 for additional information related to the fair values of our derivative instruments.
As indicated in Note 18, we net fair value amounts recognized for multiple similar derivative contracts executed with the same counterparty under master netting arrangements, including cash collateral assets and obligations. The following table, however, is presented on a gross asset and gross liability basis, which results in the reflection of certain assets in liability accounts and certain liabilities in asset accounts:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance Sheet
Location | | December 31, 2022 | | December 31, 2021 |
| | Asset
Derivatives | | Liability
Derivatives | | Asset
Derivatives | | Liability
Derivatives |
Derivatives designated as hedging instruments: | | | | | | | | | |
| Commodity contracts | Receivables, net | | $ | 61 | | | $ | 44 | | | $ | 3 | | | $ | 26 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Derivatives not designated as hedging instruments: | | | | | | | | | |
| Commodity contracts | Receivables, net | | $ | 769 | | | $ | 661 | | | $ | 519 | | | $ | 446 | |
| | | | | | | | | |
| | | | | | | | | |
| Physical purchase contracts | Inventories | | 4 | | | 4 | | | 4 | | | 5 | |
| Foreign currency contracts | Receivables, net | | — | | | — | | | 1 | | | — | |
| Foreign currency contracts | Accrued expenses | | — | | | 2 | | | — | | | 10 | |
| Total | | | $ | 773 | | | $ | 667 | | | $ | 524 | | | $ | 461 | |
Market Risk
Our price risk management activities involve the receipt or payment of fixed price commitments into the future. These transactions give rise to market risk, which is the risk that future changes in market conditions may make an instrument less valuable. We closely monitor and manage our exposure to market risk on a daily basis in accordance with policies approved by our Board. Market risks are monitored by our risk control group to ensure compliance with our stated risk management policy. We do not require any collateral or other security to support derivative instruments into which we enter. We also do not have any derivative instruments that require us to maintain a minimum investment-grade credit rating.
VALERO ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Effect of Derivative Instruments on Income and Other Comprehensive Income (Loss)
The following table provides information about the gain (loss) recognized in income and other comprehensive income (loss) due to fair value adjustments of our cash flow hedges (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Derivatives in
Cash Flow Hedging
Relationships | | Location of Gain (Loss)
Recognized in Income
on Derivatives | | Year Ended December 31, | | |
| 2022 | | 2021 | | 2020 | | |
| Commodity contracts: | | | | | | | | | | |
Gain (loss) recognized in other comprehensive income (loss) | | n/a | | $ | (292) | | | $ | (44) | | | $ | 38 | | | |
Gain (loss) reclassified from accumulated other comprehensive loss into income | | Revenues | | (286) | | | (46) | | | 34 | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
For cash flow hedges, no component of any derivative instrument’s gain or loss was excluded from the assessment of hedge effectiveness for the years ended December 31, 2022, 2021, and 2020. For the years ended December 31, 2022, 2021, and 2020, cash flow hedges primarily related to forward sales of renewable diesel. The estimated deferred after-tax loss that is expected to be reclassified into revenues over the next 12 months as a result of the hedged transactions that are forecasted to occur as of December 31, 2022 was not material. For the years ended December 31, 2022, 2021, and 2020, there were no amounts reclassified from accumulated other comprehensive loss into income as a result of the discontinuance of cash flow hedge accounting. The changes in accumulated other comprehensive loss by component, net of tax, for the years ended December 31, 2022, 2021, and 2020 are described in Note 10.
The following table provides information about the gain (loss) recognized in income on our derivative instruments with respect to our economic hedges and our foreign currency hedges and the line items in the statements of income in which such gains (losses) are reflected (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Derivatives Not
Designated as
Hedging Instruments | | Location of Gain (Loss)
Recognized in Income
on Derivatives | | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| Commodity contracts | | Revenues | | $ | (17) | | | $ | 28 | | | $ | — | |
| Commodity contracts | | Cost of materials and other | | (988) | | | (86) | | | 99 | |
| Commodity contracts | | Operating expenses
(excluding depreciation and
amortization expense) | | (1) | | | 54 | | | 2 | |
| Foreign currency contracts | | Cost of materials and other | | 73 | | | 9 | | | 27 | |
| Foreign currency contracts | | Other income, net | | (119) | | | 44 | | | (13) | |