0001035002-20-000041.txt : 20200731 0001035002-20-000041.hdr.sgml : 20200731 20200730194419 ACCESSION NUMBER: 0001035002-20-000041 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 79 CONFORMED PERIOD OF REPORT: 20200630 FILED AS OF DATE: 20200731 DATE AS OF CHANGE: 20200730 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VALERO ENERGY CORP/TX CENTRAL INDEX KEY: 0001035002 STANDARD INDUSTRIAL CLASSIFICATION: PETROLEUM REFINING [2911] IRS NUMBER: 741828067 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-13175 FILM NUMBER: 201062321 BUSINESS ADDRESS: STREET 1: P.O. BOX 696000 CITY: SAN ANTONIO STATE: TX ZIP: 78269-6000 BUSINESS PHONE: 2103452000 MAIL ADDRESS: STREET 1: P.O. BOX 696000 CITY: SAN ANTONIO STATE: TX ZIP: 78269-6000 10-Q 1 vloform10-qx6302020.htm 10-Q Document
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File Number 001-13175
VALERO ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
74-1828067
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
One Valero Way
San Antonio, Texas
(Address of principal executive offices)
78249
(Zip Code)
(210345-2000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common stock
 
VLO
 
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  No 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  No 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
 
Accelerated filer
 
Non-accelerated filer
 
 
 
Smaller reporting company
 
Emerging growth company
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  No 
The number of shares of the registrant’s only class of common stock, $0.01 par value, outstanding as of July 20, 2020 was 407,757,274.
 
 
 
 
 



VALERO ENERGY CORPORATION
TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 




i



PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

VALERO ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(millions of dollars, except par value)
 
June 30,
2020
 
December 31,
2019
 
(unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
2,319

 
$
2,583

Receivables, net
4,152

 
8,904

Inventories
5,420

 
7,013

Prepaid expenses and other
871

 
469

Total current assets
12,762

 
18,969

Property, plant, and equipment, at cost
46,335

 
44,294

Accumulated depreciation
(15,682
)
 
(15,030
)
Property, plant, and equipment, net
30,653

 
29,264

Deferred charges and other assets, net
5,684

 
5,631

Total assets
$
49,099

 
$
53,864

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Current portion of debt and finance lease obligations
$
587

 
$
494

Accounts payable
4,652

 
10,205

Accrued expenses
861

 
949

Taxes other than income taxes payable
1,083

 
1,304

Income taxes payable
117

 
208

Total current liabilities
7,300

 
13,160

Debt and finance lease obligations, less current portion
12,090

 
9,178

Deferred income tax liabilities
5,305

 
5,103

Other long-term liabilities
3,770

 
3,887

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
6,824

 
6,821

Treasury stock, at cost;
265,748,331 and 264,209,742 common shares
(15,760
)
 
(15,648
)
Retained earnings
30,575

 
31,974

Accumulated other comprehensive loss
(1,799
)
 
(1,351
)
Total Valero Energy Corporation stockholders’ equity
19,847


21,803

Noncontrolling interests
787

 
733

Total equity
20,634

 
22,536

Total liabilities and equity
$
49,099

 
$
53,864

See Condensed Notes to Consolidated Financial Statements.


1



VALERO ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(millions of dollars, except per share amounts)
(unaudited)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2020
 
2019
 
2020
 
2019
Revenues (a)
$
10,397

 
$
28,933

 
$
32,499

 
$
53,196

Cost of sales:
 
 
 
 
 
 
 
Cost of materials and other
9,079

 
26,083

 
29,031

 
48,061

Lower of cost or market (LCM) inventory valuation adjustment
(2,248
)
 

 
294

 

Operating expenses (excluding depreciation and amortization
expense reflected below)
1,027

 
1,175

 
2,151

 
2,390

Depreciation and amortization expense
566

 
552

 
1,135

 
1,089

Total cost of sales
8,424

 
27,810

 
32,611

 
51,540

Other operating expenses
3

 
2

 
5

 
4

General and administrative expenses (excluding depreciation and
amortization expense reflected below)
169

 
199

 
346

 
408

Depreciation and amortization expense
12

 
14

 
25

 
28

Operating income (loss)
1,789

 
908

 
(488
)
 
1,216

Other income, net
27

 
12

 
59

 
34

Interest and debt expense, net of capitalized interest
(142
)
 
(112
)
 
(267
)
 
(224
)
Income (loss) before income tax expense (benefit)
1,674

 
808

 
(696
)
 
1,026

Income tax expense (benefit)
339

 
160

 
(277
)
 
211

Net income (loss)
1,335

 
648

 
(419
)
 
815

Less: Net income attributable to noncontrolling interests
82

 
36

 
179

 
62

Net income (loss) attributable to Valero Energy Corporation
stockholders
$
1,253

 
$
612

 
$
(598
)
 
$
753

 
 
 
 
 
 
 
 
Earnings (loss) per common share
$
3.07

 
$
1.47

 
$
(1.48
)
 
$
1.80

Weighted-average common shares outstanding (in millions)
406

 
415

 
407

 
416

 
 
 
 
 
 
 
 
Earnings (loss) per common share – assuming dilution
$
3.07

 
$
1.47

 
$
(1.48
)
 
$
1.80

Weighted-average common shares outstanding –
assuming dilution (in millions)
407

 
417

 
407

 
417

_______________________________________________
 
 
 
 
 
 
 
Supplemental information:
 
 
 
 
 
 
 
(a)    Includes excise taxes on sales by certain of our international
operations
$
784

 
$
1,410

 
$
2,152

 
$
2,740


See Condensed Notes to Consolidated Financial Statements.


2



VALERO ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(millions of dollars)
(unaudited)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2020
 
2019
 
2020
 
2019
Net income (loss)
$
1,335

 
$
648

 
$
(419
)
 
$
815

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustment
138

 

 
(469
)
 
155

Net gain on pension and other postretirement
benefits
12

 
2

 
24

 
5

Net gain (loss) on cash flow hedges
(25
)
 
5

 
4

 
5

Other comprehensive income (loss) before
income tax expense (benefit)
125

 
7

 
(441
)
 
165

Income tax expense (benefit) related to items of
other comprehensive income (loss)
(1
)
 
1

 
5

 
2

Other comprehensive income (loss)
126

 
6

 
(446
)
 
163

Comprehensive income (loss)
1,461

 
654

 
(865
)
 
978

Less: Comprehensive income attributable
to noncontrolling interests
70

 
40

 
181

 
68

Comprehensive income (loss) attributable to
Valero Energy Corporation stockholders
$
1,391

 
$
614

 
$
(1,046
)
 
$
910


See Condensed Notes to Consolidated Financial Statements.


3



VALERO ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY
(millions of dollars)
(unaudited)
 
Valero Energy Corporation Stockholders’ Equity
 
 
 
 
 
Common
Stock
 
Additional
Paid-in
Capital
 
Treasury
Stock
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Total
 
Non-
controlling
Interests
 
Total
Equity
Balance as of March 31, 2020
$
7

 
$
6,814

 
$
(15,764
)
 
$
29,722

 
$
(1,937
)
 
$
18,842

 
$
843

 
$
19,685

Net income

 

 

 
1,253

 

 
1,253

 
82

 
1,335

Dividends on common stock
($0.98 per share)

 

 

 
(400
)
 

 
(400
)
 

 
(400
)
Stock-based compensation
expense

 
12

 

 

 

 
12

 

 
12

Transactions in connection
with stock-based
compensation plans

 
(2
)
 
4

 

 

 
2

 

 
2

Distributions to noncontrolling
interests

 

 

 

 

 

 
(126
)
 
(126
)
Other comprehensive
income (loss)

 

 

 

 
138

 
138

 
(12
)
 
126

Balance as of June 30, 2020
$
7

 
$
6,824

 
$
(15,760
)
 
$
30,575


$
(1,799
)

$
19,847


$
787


$
20,634

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of March 31, 2019
$
7

 
$
6,802

 
$
(14,958
)
 
$
30,810

 
$
(1,352
)
 
$
21,309

 
$
470

 
$
21,779

Net income

 

 

 
612

 

 
612

 
36

 
648

Dividends on common stock
($0.90 per share)

 

 

 
(376
)
 

 
(376
)
 

 
(376
)
Stock-based compensation
expense

 
11

 

 

 

 
11

 

 
11

Transactions in connection
with stock-based
compensation plans

 
(1
)
 

 

 

 
(1
)
 

 
(1
)
Open market stock purchases

 

 
(212
)
 

 

 
(212
)
 

 
(212
)
Distributions to noncontrolling
interests

 

 

 

 

 

 
(18
)
 
(18
)
Other comprehensive income

 

 

 

 
2

 
2

 
4

 
6

Balance as of June 30, 2019
$
7

 
$
6,812


$
(15,170
)

$
31,046


$
(1,350
)

$
21,345


$
492


$
21,837


See Condensed Notes to Consolidated Financial Statements.



4



VALERO ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY (Continued)
(millions of dollars)
(unaudited)
 
Valero Energy Corporation Stockholders’ Equity
 
 
 
 
 
Common
Stock
 
Additional
Paid-in
Capital
 
Treasury
Stock
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Total
 
Non-
controlling
Interests
 
Total
Equity
Balance as of December 31, 2019
$
7

 
$
6,821

 
$
(15,648
)
 
$
31,974

 
$
(1,351
)
 
$
21,803

 
$
733

 
$
22,536

Net income (loss)

 

 

 
(598
)
 

 
(598
)
 
179

 
(419
)
Dividends on common stock
($1.96 per share)

 

 

 
(801
)
 

 
(801
)
 

 
(801
)
Stock-based compensation
expense

 
36

 

 

 

 
36

 

 
36

Transactions in connection
with stock-based
compensation plans

 
(33
)
 
18

 

 

 
(15
)
 

 
(15
)
Open market stock purchases

 

 
(130
)
 

 

 
(130
)
 

 
(130
)
Distributions to noncontrolling
interests

 

 

 

 

 

 
(127
)
 
(127
)
Other comprehensive
income (loss)

 

 

 

 
(448
)
 
(448
)
 
2

 
(446
)
Balance as of June 30, 2020
$
7

 
$
6,824


$
(15,760
)

$
30,575


$
(1,799
)

$
19,847


$
787


$
20,634

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of December 31, 2018
$
7

 
$
7,048

 
$
(14,925
)
 
$
31,044

 
$
(1,507
)
 
$
21,667

 
$
1,064

 
$
22,731

Net income

 

 

 
753

 

 
753

 
62

 
815

Dividends on common stock
($1.80 per share)

 

 

 
(751
)
 

 
(751
)
 

 
(751
)
Stock-based compensation
expense

 
21

 

 

 

 
21

 

 
21

Transactions in connection
with stock-based
compensation plans

 
(3
)
 
1

 

 

 
(2
)
 

 
(2
)
Open market stock purchases

 

 
(246
)
 

 

 
(246
)
 

 
(246
)
Acquisition of Valero Energy
Partners LP (VLP) publicly
held common units

 
(328
)
 

 

 

 
(328
)
 
(622
)
 
(950
)
Distributions to noncontrolling
interests

 

 

 

 

 

 
(18
)
 
(18
)
Other

 
74

 

 

 

 
74

 

 
74

Other comprehensive income

 

 

 

 
157

 
157

 
6

 
163

Balance as of June 30, 2019
$
7

 
$
6,812


$
(15,170
)

$
31,046


$
(1,350
)

$
21,345


$
492


$
21,837


See Condensed Notes to Consolidated Financial Statements.


5



VALERO ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(millions of dollars)
(unaudited)
 
Six Months Ended
June 30,
 
2020
 
2019
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(419
)
 
$
815

Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
 
 
 
Depreciation and amortization expense
1,160

 
1,117

LCM inventory valuation adjustment
294

 

Deferred income tax expense (benefit)
223

 
(12
)
Changes in current assets and current liabilities
(478
)
 
413

Changes in deferred charges and credits and
other operating activities, net
(93
)
 
61

Net cash provided by operating activities
687

 
2,394

Cash flows from investing activities:
 
 
 
Capital expenditures (excluding variable interest entities (VIEs))
(555
)
 
(854
)
Capital expenditures of VIEs:
 
 
 
Diamond Green Diesel Holdings LLC (DGD)
(177
)
 
(51
)
Other VIEs
(143
)
 
(69
)
Deferred turnaround and catalyst cost expenditures (excluding VIEs)
(437
)
 
(470
)
Deferred turnaround and catalyst cost expenditures of DGD
(10
)
 
(1
)
Investments in unconsolidated joint ventures
(29
)
 
(90
)
Acquisitions of undivided interests

 
(29
)
Other investing activities, net
12

 
9

Net cash used in investing activities
(1,339
)
 
(1,555
)
Cash flows from financing activities:
 
 
 
Proceeds from debt issuances and borrowings (excluding VIEs)
1,799

 
1,892

Proceeds from borrowings of VIEs
163

 
70

Repayments of debt and finance lease obligations (excluding VIEs)
(432
)
 
(1,792
)
Repayments of debt of VIEs
(3
)
 
(3
)
Purchases of common stock for treasury
(147
)
 
(248
)
Common stock dividends
(801
)
 
(751
)
Acquisition of VLP publicly held common units

 
(950
)
Distributions to noncontrolling interests
(127
)
 
(18
)
Other financing activities, net
(17
)
 
(25
)
Net cash provided by (used in) financing activities
435

 
(1,825
)
Effect of foreign exchange rate changes on cash
(47
)
 
37

Net decrease in cash and cash equivalents
(264
)
 
(949
)
Cash and cash equivalents at beginning of period
2,583

 
2,982

Cash and cash equivalents at end of period
$
2,319

 
$
2,033

See Condensed Notes to Consolidated Financial Statements.


6




VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation
General
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.

These unaudited financial statements have been prepared in accordance with United States (U.S.) generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities Exchange Act of 1934. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All such adjustments are of a normal recurring nature unless disclosed otherwise. Operating results for the six months ended June 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. As discussed in Note 2, the outbreak of COVID-19 and its development into a pandemic in March 2020 resulted in significant economic disruption globally. This disruption became more acute in the latter half of March 2020. While demand and market prices for most of our products increased during the second quarter of 2020 compared to the end of the first quarter of 2020, developments with respect to COVID-19 have been occurring at a rapid pace and the risk remains that circumstances could change. For instance, during the latter part of the second quarter of 2020, governmental authorities in various states across the U.S. began to lift many of the restrictions created by actions taken to slow down the spread of COVID-19. However, many of the states where such restrictions were lifted, and several states where the restrictions have essentially never been lifted (such as California in our U.S. West Coast region), have recently experienced a marked increase in the spread of COVID-19 and many governmental authorities in such areas have responded by reimposing certain restrictions they had previously lifted. Therefore, our operating results for the six months ended June 30, 2020 do not fully reflect the impact this disruption will likely continue to have on us.

The balance sheet as of December 31, 2019 has been derived from our audited financial statements as of that date. For further information, refer to our financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2019.

Reclassifications
Prior year amounts for capital expenditures, deferred turnaround and catalyst cost expenditures, and repayments of debt and finance lease obligations in the consolidated statements of cash flows have been reclassified to conform to the 2020 presentation to separately present these activities for us and our consolidated VIEs.

Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. On an ongoing basis, we review our estimates based on currently available information. Changes in facts and circumstances may result in revised estimates.



7





VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Adoption of Accounting Pronouncements
We adopted the following Accounting Standards Updates (ASUs) on January 1, 2020. Our adoption of these ASUs did not have a material impact on our financial statements or related disclosures.
ASU
 
Basis of
Adoption
2016-13
Financial Instruments—Credit Losses (Topic 326): Measurement of
Credit Losses on Financial Instruments (including codification
improvements in ASUs 2018-19 and 2019-11 and ASU 2020-02—
Financial Instruments—Credit Losses (Topic 326): Amendments
to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119)
 
Cumulative
effect
2018-15
Intangibles—Goodwill and Other—Internal-Use Software
(Subtopic 350-40): Customer’s Accounting for Implementation Costs
Incurred in a Cloud Computing Arrangement That Is a Service Contract
 
Prospectively
2019-12
Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes
 
Prospectively


The following ASU was issued on and adopted by us on March 12, 2020. Our adoption of this ASU did not have a material impact on our financial statements or related disclosures.
ASU
 
Basis of
Adoption
2020-04
Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference
Rate Reform on Financial Reporting
 
Prospectively


2.
UNCERTAINTIES AND CERTAIN SIGNIFICANT ACCOUNTING ESTIMATES

Overview
The outbreak of COVID-19 and its development into a pandemic in March 2020 and certain developments in the global oil markets have impacted and continue to impact our business. We responded, and will strive to continue to respond, to the impact from these matters on our business. We reduced the amount of crude oil processed at most of our refineries in response to the decreased demand for our products, we temporarily idled various gasoline-making units at certain of our refineries to further limit gasoline production, and we took measures to reduce jet fuel production. Eight of our ethanol plants were temporarily idled, and production at our remaining six ethanol plants was reduced earlier this year to address the decreased demand for ethanol. Demand for most of our products partially recovered during the latter part of the second quarter of 2020. As a result, we have increased the production of most of our products and recently restarted the gasoline-making units and four ethanol plants that had been temporarily idled.
Many uncertainties remain with respect to COVID-19, including its resulting economic effects, and we are unable to predict the ultimate economic impacts from COVID-19 on our business and how quickly national economies can recover once the pandemic subsides, or whether any recovery will ultimately experience a reversal or other setbacks. However, the adverse impacts of the economic effects from COVID-19 and uncertainty in the global oil markets on our business have been and will likely continue to be significant. We believe we have proactively addressed many of the known impacts of COVID-19 to the extent possible and we will strive to continue to do so, but there can be no assurance that any measures we have taken or may take will be fully effective. As a result, we expect these matters may affect our estimates and assumptions on amounts reported in the financial statements and accompanying notes in the near term.


8





VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Impairment Analysis of Long-Lived Assets
Due to the adverse economic conditions discussed above, we reviewed our significant operating assets for the existence of impairment indicators. As a result of this review, we evaluated six ethanol plants for potential impairment as of June 30, 2020, assuming that we would operate these plants in the future and considering current economic conditions on our future estimated cash flows. Based on our analysis, we determined that the carrying amount of each of these plants was recoverable, as the undiscounted future cash flows from each plant exceeded its respective carrying value. Nonetheless, we will continue to evaluate the economic conditions and their impact on our assumptions.

Impairment Analysis of Goodwill
We have $260 million of goodwill as of June 30, 2020. All of our goodwill is allocated to one reporting unit, the U.S. Gulf Coast refining region. Our annual test for the impairment of goodwill is performed on October 1 of each year. However, as discussed above, there were adverse changes in the capital and commodity markets that contributed to a significant decline in our common stock price compared to the price as of December 31, 2019 and early March 2020. Despite the decline in our common stock price, we determined our goodwill was not impaired as of June 30, 2020. Nonetheless, we will continue to evaluate the economic conditions and their impact on our assumptions.

Inventory Valuation
See Note 4 regarding our $294 million LCM inventory valuation reserve and the estimates used to determine the market value of our inventories.

3.
MERGER WITH VLP

On January 10, 2019, we completed our acquisition of all of the outstanding publicly held common units of VLP pursuant to a definitive Agreement and Plan of Merger (Merger Agreement, and together with the transactions contemplated thereby, the Merger Transaction) with VLP. Upon completion of the Merger Transaction, each outstanding publicly held common unit was converted into the right to receive $42.25 per common unit in cash without any interest thereon, and all such publicly traded common units were automatically canceled and ceased to exist. Upon completion of the Merger Transaction, we paid aggregate merger consideration of $950 million, which was funded with available cash on hand.

Prior to the completion of the Merger Transaction, we consolidated the financial statements of VLP and reflected noncontrolling interests on our balance sheet for the portion of VLP’s partners’ capital held by VLP’s public common unitholders. Upon completion of the Merger Transaction, VLP became our indirect wholly owned subsidiary and, as a result, we no longer reflect noncontrolling interests on our balance sheet with respect to VLP. In addition, we no longer attribute a portion of VLP’s net income to noncontrolling interests. Because we had a controlling financial interest in VLP before the Merger Transaction and retained our controlling financial interest in VLP after the Merger Transaction, the change in our ownership interest in VLP as a result of the merger was accounted for as an equity transaction. Accordingly, we did not recognize a gain or loss on the Merger Transaction.



9





VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4.
INVENTORIES

Inventories consisted of the following (in millions):
 
June 30,
2020

December 31,
2019
Refinery feedstocks
$
2,000

 
$
2,399

Refined petroleum products and blendstocks
3,161

 
4,034

Renewable diesel feedstocks and products
53

 
46

Ethanol feedstocks and products
224

 
260

Materials and supplies
276

 
274

Inventories before LCM inventory valuation reserve
5,714

 
7,013

LCM inventory valuation reserve
(294
)
 

Inventories
$
5,420

 
$
7,013



We compare the market value of inventories to their cost on an aggregate basis, excluding materials and supplies. In determining the market value of our inventories, we assume that feedstocks are converted into refined products, which requires us to make estimates regarding the refined products expected to be produced from those feedstocks and the conversion costs required to convert those feedstocks into refined 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 is less than the aggregate cost, we recognize a loss for the difference in our statements of income. To the extent the aggregate market value subsequently increases, we would recognize an increase to the value of our inventories (not to exceed cost) and a gain in our statements of income.

The market value of our last-in, first-out (LIFO) inventory fell below our historical LIFO inventory costs 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 June 30, 2020, our LCM inventory valuation reserve was $294 million. The change in our LCM inventory valuation reserve resulted in a net benefit of $2.2 billion and a net charge of $294 million to our results of operations during the three and six months ended June 30, 2020, respectively. As of December 31, 2019, the replacement cost (market value) of LIFO inventories exceeded their LIFO carrying amounts by $2.5 billion.

Our non-LIFO inventories accounted for $912 million and $1.4 billion of our total inventories as of June 30, 2020 and December 31, 2019, respectively.


10





VALERO ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5.
LEASES

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 by class of underlying asset was as follows (in millions):
 
Pipelines,
Terminals,
and Tanks
 
Transportation
 
Feedstock
Processing
Equipment
 
Energy
and
Gases
 
Real
Estate
 
Other
 
Total
 
 
Marine
 
Rail
 
 
 
 
 
Three months ended
June 30, 2020
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Finance lease cost:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amortization of right-of-use
(ROU) assets
$
28

 
$

 
$

 
$
3

 
$
1

 
$

 
$

 
$
32

Interest on lease liabilities
25

 

 

 
1

 

 

 

 
26

Operating lease cost
42

 
37

 
15

 
4

 
2

 
6

 
1

 
107

Variable lease cost
17

 
15

 

 

 

 
1

 

 
33

Short-term lease cost
2

 
14

 

 
7

 

 

 

 
23

Sublease income

 
(2
)