VALERO ENERGY CORP/TX (VLO) FY 2021 MD&A

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, 2021 and 2020 and comparisons between such years. The discussions for the year ended December 31, 2019 and comparisons between the years ended December 31, 2020 and 2019 have been omitted from this annual report on Form 10-K for the year ended December 31, 2021, 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, 2020, which was filed on February 23, 2021.

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 effect, impact, potential duration or timing, or other implications of the COVID-19 pandemic, government restrictions, requirements, or mandates in response thereto, variants of the COVID-19 virus, vaccine distribution and administration levels, economic activity, and global crude oil production levels, and any expectations we may have with respect thereto, including with respect to our responses thereto, our operations and the production levels of our assets;

•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;

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•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 repurchase 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 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/offset targets and our current and any future carbon transition 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:

•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, including requirements and mandates with respect to vaccines, vaccine distribution and administration levels, and the adverse impacts of the foregoing on our business, financial condition, results of operations, and liquidity, including, but not limited to, our growth, operating costs, administrative costs, supply chain, labor availability, logistical capabilities, customer demand for our products, and industry demand generally, margins, production and throughput capacity, utilization, inventory value, cash

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position, taxes, the price of our securities and trading markets with respect thereto, our ability to access capital markets, 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;

•political and economic conditions in nations 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 seasonal fluctuations;

•refinery, renewable diesel plant, or ethanol plant overcapacity or undercapacity;

•the risk that any divestitures 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) and emission credits needed under the other environmental emissions programs;

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

•earthquakes, hurricanes, tornadoes, and 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 governmental authorities, such as tariffs, environmental regulations, changes to income tax rates, introduction of a global minimum tax, tax changes or restrictions impacting the foreign repatriation of cash, actions implemented under the Renewable and Low-Carbon Fuel

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Blending Programs and the 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 governmental 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 expropriation or impoundment of assets, failure of foreign governments and state-owned entities to honor their contracts, property disputes, 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

•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 (loss) (including adjusted operating income (loss) 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 (e) beginning on page 51 for reconciliations of adjusted operating income (loss) (including adjusted operating

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income (loss) 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 (e), 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.

IMPACT OF THE COVID-19 PANDEMIC TO OUR BUSINESS

The COVID-19 pandemic has negatively impacted our business. Although we experienced improvements in our business in 2021 compared to the significant negative effects from the pandemic in 2020, the long-term implications of the pandemic on our results of operations and financial position remain uncertain. Information about the uncertainties of the COVID-19 pandemic on our business is discussed in ITEM 1A. RISK FACTORS—The ongoing COVID-19 pandemic and the related events and circumstances have had, and may continue to have, negative impacts on our business, financial condition, results of operations, and liquidity and those of our customers, suppliers, and other counterparties.” and Note 2 of Notes to Consolidated Financial Statements.

OVERVIEW AND OUTLOOK

Overview

Business Operations Update

Our business continued to recover throughout 2021 after experiencing significant negative effects from a decrease in demand and market prices for most of our products in 2020 as a result of the COVID-19 pandemic. The outbreak of COVID-19 and its development into a pandemic in March 2020 disrupted the global economy and significantly reduced the demand and market prices for most of our products, primarily gasoline and diesel. However, by mid-2020, we began experiencing increased demand and higher market prices for most of our products, and these improvements continued throughout 2021 along with the ongoing recovery of the global economy as worldwide efforts to address the virus progressed, including the development and distribution of multiple COVID-19 vaccines and therapeutics. Gasoline and diesel demand returned to pre-pandemic levels during 2021 in most of the regions where we operate, and at times during 2021, we experienced demand for diesel in excess of pre-pandemic levels. Jet fuel demand also improved in 2021, although at a slower pace than other products we produce relative to pre-pandemic levels. These improvements in demand and an associated increase in refining margins were primary contributors to us reporting $930 million of net income attributable to Valero stockholders for the year ended December 31, 2021. Our operating results for 2021, including operating results by segment, are described in the following summary, and detailed descriptions can be found below under “RESULTS OF OPERATIONS.”

Our improved 2021 results, however, were negatively impacted by estimated excess energy costs of $579 million ($467 million after taxes) as a result of a significant increase in the cost of electricity and natural gas at certain of our refineries and ethanol plants arising out of Winter Storm Uri in February 2021. In addition, our operations were negatively impacted by Hurricane Ida in August 2021, which caused us to shut down two refineries and our renewable diesel plant in Louisiana in preparation for the storm. Although the refineries and the plant sustained minimal damage from the hurricane, we were delayed from restarting operations until electrical supply and other utilities were restored and from shipping product to our customers until the Mississippi River was reopened to ship and barge traffic.

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As a result of our improved business and overall market conditions, our operations generated $5.9 billion of cash in 2021, which included the receipt of our 2020 U.S. federal income tax refund of $962 million in May 2021. This cash was used to make $2.5 billion of capital investments in our business and return $1.6 billion to our stockholders through dividend payments. In addition, we reduced our long-term debt by $1.3 billion in 2021 through a series of debt reduction and refinancing transactions, as described in Note 10 of Notes to Consolidated Financial Statements. As a result of this and other activity, our cash and cash equivalents increased by $809 million during 2021, from $3.3 billion as of December 31, 2020 to $4.1 billion as of December 31, 2021. We had $9.3 billion in liquidity as of December 31, 2021. 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, 2021

For 2021, we reported net income attributable to Valero stockholders of $930 million compared to a net loss attributable to Valero stockholders of $1.4 billion for 2020. The increase of $2.4 billion was primarily due to higher operating income of $3.7 billion, partially offset by higher income tax expense of $1.2 billion. The details of our operating income (loss) and adjusted operating income (loss) by segment and in total are reflected below. Adjusted operating income (loss) excludes the adjustments reflected in the tables in note (e) on page 51.

While our operating income increased by $3.7 billion in 2021 compared to 2020, adjusted operating income increased by $3.6 billion primarily due to the following:

•Refining segment. Refining segment adjusted operating income increased by $3.1 billion primarily due to higher gasoline and distillate (primarily diesel) margins and higher throughput volumes, partially offset by the higher cost of compliance credits, lower discounts on crude oils, and estimated excess energy costs arising from Winter Storm Uri.

•Renewable Diesel segment. Renewable Diesel segment adjusted operating income increased by $74 million primarily due to higher renewable diesel prices and higher sales volumes, partially offset by higher feedstock costs, an unfavorable impact from commodity derivative instruments associated with our price risk management activities, and higher operating expenses (excluding depreciation and amortization expense).

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•Ethanol segment. Ethanol segment adjusted operating income increased by $558 million primarily due to higher ethanol and corn related co-product prices and higher production volumes, partially offset by higher corn prices and estimated excess energy costs arising from Winter Storm Uri.

Outlook

As previously discussed, many uncertainties remain with respect to the COVID-19 pandemic, and while it is difficult to predict the ultimate economic impacts that the pandemic will have on us and how quickly we can (or ultimately will) fully recover once the pandemic subsides, we have noted several factors below that have impacted or may impact our results of operations during the first quarter of 2022.

•Gasoline and diesel demand has returned to pre-pandemic levels and is expected to follow typical seasonal patterns. Jet fuel demand continues to improve slowly but remains below pre-pandemic levels.

•Sour crude oil discounts are expected to continue to improve as OPEC increases its production of sour crude oils in response to anticipated continued growth in global crude oil demand.

•Renewable diesel margins are expected to moderate from the levels achieved in 2021. Following the start-up of the expansion of the DGD Plant in the fourth quarter of 2021, renewable diesel production capacity increased by 410 million gallons per year, from 290 million gallons to 700 million gallons per year.

•Ethanol margins are expected to decline from the record high levels achieved in 2021 as ethanol inventory levels rise throughout the U.S. market.

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RESULTS OF OPERATIONS

The following tables, including the reconciliations of non-GAAP financial measures to their most directly comparable GAAP financial measures in note (e), 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 53.

Financial Highlights by Segment and Total Company

(millions of dollars)

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Financial Highlights by Segment and Total Company (continued)

(millions of dollars)

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Average Market Reference Prices and Differentials

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Average Market Reference Prices and Differentials, (continued)

2021 Compared to 2020

Total Company, Corporate, and Other

The following table includes selected financial data for the total company, corporate, and other for 2021 and 2020. The selected financial data is derived from the Financial Highlights by Segment and Total Company tables, unless otherwise noted.

Revenues increased by $49.1 billion in 2021 compared to 2020 primarily due to increases in the product prices of 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 materials and other of $43.8 billion primarily due to increases in crude oil and other feedstock costs; higher operating expenses (excluding depreciation and amortization expense) of $1.3 billion, which includes the impact of estimated excess energy costs of $532 million arising out of Winter Storm Uri; and an increase in general and administrative expenses (excluding depreciation and amortization expense) of $109 million primarily due to an increase in certain employee compensation expenses of $69 million, higher advertising expenses of $15 million, and higher charitable contributions of $12 million. The increase in cost of materials and other was partially offset by the favorable effect from a $224 million LIFO liquidation adjustment in 2020.

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These changes resulted in a $3.7 billion increase in operating income, from an operating loss of $1.6 billion in 2020 to operating income of $2.1 billion in 2021.

Adjusted operating income increased by $3.6 billion, from an adjusted operating loss of $1.3 billion in 2020 to adjusted operating income of $2.3 billion in 2021. The components of this $3.6 billion increase in adjusted operating income are discussed by segment in the segment analyses that follow.

“Other income, net” decreased by $116 million in 2021 compared to 2020 primarily due to a charge of $193 million from the early redemption and retirement of debt and an asset impairment loss of $24 million resulting from the cancellation of a pipeline extension project by our nonconsolidated joint venture, Diamond Pipeline LLC, partially offset by the gain of $62 million on the sale of a 24.99 percent membership interest in MVP Terminalling, LLC (MVP). These items occurred in 2021 and are more fully described in note (c).

“Interest and debt expense, net of capitalized interest” increased by $40 million in 2021 compared to 2020 primarily due to the effect of 2021 reflecting a full year of interest expense associated with $4.0 billion aggregate principal amount of debt we issued in public debt offerings in 2020. See Note 10 of Notes to Consolidated Financial Statements for additional information.

Income tax expense increased by $1.2 billion in 2021 compared to 2020 primarily as a result of higher income before income tax expense. In addition, the increase in income tax expense was impacted by a $64 million charge, which resulted from certain statutory tax rate changes in 2021, as discussed in note (d), as well as a higher benefit in 2020 of $304 million associated with the U.S. federal tax net operating loss for 2020, which was carried back to 2015 when the U.S. federal statutory rate was 35 percent. See Note 16 of Notes to Consolidated Financial Statements for additional information on these tax matters.

Net income attributable to noncontrolling interests increased by $44 million in 2021 compared to 2020 primarily due to higher earnings associated with DGD, a consolidated joint venture. See Note 13 of Notes to Consolidated Financial Statements regarding our accounting for DGD.

Refining Segment Results

The following table includes selected financial and operating data of our Refining segment for 2021 and 2020. The selected financial data is derived from the Financial Highlights by Segment and Total Company tables, unless otherwise noted.

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Refining segment operating income increased by $3.2 billion in 2021; however, Refining segment adjusted operating income, which excludes the adjustments in the table in note (e), increased by $3.1 billion in 2021 compared to 2020. 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 $4.2 billion in 2021 compared to 2020.

Refining segment margin is primarily affected by the prices of the petroleum-based transportation fuels that we sell and the cost of crude oil and other feedstocks that we process. The table on page 44 reflects market reference prices and differentials that we believe had a material impact on the change in our Refining segment margin in 2021 compared to 2020.

The increase in Refining segment margin was primarily due to the following:

◦An increase in gasoline margins had a favorable impact of approximately $3.8 billion.

◦An increase in distillate (primarily diesel) margins had a favorable impact of approximately $1.7 billion.

◦An increase in throughput volumes of 232,000 BPD had a favorable impact of approximately $766 million. As noted above in “OVERVIEW AND OUTLOOK—Overview—Business Operations Update,” we continued to recover from the negative impacts of the COVID-19 pandemic throughout 2021 and have increased production of most of our products at our refineries to align with improvements in demand.

◦An increase in the cost of credits (primarily RINs) needed to comply with the Renewable and Low-Carbon Fuels Blending Programs had an unfavorable impact of $1.3 billion.

◦Lower discounts on crude oils had an unfavorable impact of approximately $710 million.

•Refining segment operating expenses (excluding depreciation and amortization expense) increased by $1.1 billion primarily due to higher energy costs of $845 million, which includes the effect of estimated excess energy costs arising out of Winter Storm Uri of $478 million (see note (a)), and an increase in certain employee compensation expenses of $138 million.

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Renewable Diesel Segment Results

The following table includes selected financial and operating data of our Renewable Diesel segment for 2021 and 2020. The selected financial data is derived from the Financial Highlights by Segment and Total Company tables, unless otherwise noted.

Renewable Diesel segment operating income increased by $71 million in 2021; however, Renewable Diesel segment adjusted operating income, which excludes the adjustment in the table in note (e), increased by $74 million in 2021 compared to 2020. 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 $137 million in 2021 compared to 2020.

Renewable Diesel segment margin is primarily affected by the price of the renewable diesel that we sell and the cost of the feedstocks that we process. The table on page 45 reflects market reference prices that we believe had a material impact on the change in our Renewable Diesel segment margin in 2021 compared to 2020.

The increase in Renewable Diesel segment margin was primarily due to the following:

◦Higher renewable diesel prices had a favorable impact of approximately $768 million.

◦An increase in sales volumes of 227,000 gallons per day had a favorable impact of approximately $202 million. The increase in sales volume was primarily due to the additional production capacity resulting from the expansion of the DGD Plant that commenced operations in the fourth quarter of 2021.

◦An increase in the cost of the feedstocks we process had an unfavorable impact of approximately $731 million.

◦Price risk management activities had an unfavorable impact of $80 million. We recognized a hedge loss of $46 million in 2021 compared to a hedge gain of $34 million in 2020.

•Renewable Diesel segment operating expenses (excluding depreciation and amortization expense) increased by $49 million primarily due to higher chemical and catalyst costs of $14 million,

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higher outside services of $11 million, an increase in certain employee compensation expenses of $11 million, and higher energy costs of $4 million.

Ethanol Segment Results

The following table includes selected financial and operating data of our Ethanol segment for 2021 and 2020. The selected financial data is derived from the Financial Highlights by Segment and Total Company tables, unless otherwise noted.

Ethanol segment operating income increased by $542 million in 2021; however, Ethanol segment adjusted operating income, which excludes the adjustments in the table in note (e), increased by $558 million in 2021 compared to 2020. The components of this increase in the adjusted results, along with the reasons for the changes in these components, are outlined below.

•Ethanol segment margin increased by $700 million in 2021 compared to 2020.

Ethanol segment margin is primarily affected by prices of the ethanol and corn related co-products that we sell and the cost of corn that we process. The table on page 45 reflects market reference prices that we believe had a material impact on the change in our Ethanol segment margin in 2021 compared to 2020.

The increase in Ethanol segment margin was primarily due to the following:

◦Higher ethanol prices had a favorable impact of approximately $1.4 billion.

◦Higher prices on the co-products that we produce, primarily DDGs, had a favorable impact of approximately $270 million.

◦An increase in production volumes of 361,000 gallons per day had a favorable impact of approximately $114 million. As noted above in “OVERVIEW AND OUTLOOK—Overview—Business Operations Update,” we continued to recover from the impacts of the COVID-19 pandemic throughout 2021 and have increased the aggregate production of ethanol across our plants to align with improvements in demand.

◦Higher corn prices had an unfavorable impact of approximately $1.1 billion.

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•Ethanol segment operating expenses (excluding depreciation and amortization expense) increased by $150 million primarily due to higher energy costs, which includes the effect of estimated excess energy costs arising out of Winter Storm Uri of $54 million (see note (a)).

________________________

The following notes relate to references on pages 42 through 50.

(a)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):

(b)Cost of materials and other for the year ended December 31, 2020 includes a charge of $224 million related to the liquidation of LIFO inventory layers attributable to our Refining and Ethanol segments. Our inventory levels decreased throughout 2020 due to lower production resulting from lower demand for our products caused by the negative economic impacts of COVID-19 on our business. As a result, our inventory levels at December 31, 2020 were below their December 31, 2019 levels. Of the $224 million charge recognized for the year ended December 31, 2020, $222 million and $2 million is attributable to our Refining and Ethanol segments, respectively.

(c)“Other income, net” for the year ended December 31, 2021 includes the following:

•a gain of $62 million on the sale of a 24.99 percent membership interest in MVP, a nonconsolidated joint venture with a subsidiary of Magellan Midstream Partners, L.P., for $270 million;

•a charge of $24 million representing our portion of the asset impairment loss recognized by Diamond Pipeline LLC, a nonconsolidated joint venture with a subsidiary of Plains All American Pipeline, L.P., resulting from the joint venture’s cancellation of its pipeline extension project; and

•a charge of $193 million from the early redemption and retirement of approximately $2.1 billion aggregate principal amount of various series of our senior notes during the year ended December 31, 2021.

(d)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 during the year ended December 31, 2021 that resulted in the remeasurement of our deferred tax liabilities. Under GAAP, we are required to recognize the effect of a change in tax law in the period of enactment. As a result, we recognized deferred income tax expense of $64 million during the year ended December 31, 2021, which represents the net increase in our deferred tax liabilities resulting from the changes in the tax rates.

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(e)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 through the exclusion of certain items that we believe are not indicative of our core operating performance and that may obscure our underlying business results and trends. These non-GAAP measures should not be considered as alternatives to their most comparable 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 (loss) excluding the LIFO liquidation adjustment, the LCM inventory valuation adjustment, operating expenses (excluding depreciation and amortization expense), depreciation and amortization expense, and other operating expenses, as reflected in the table below.

•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.

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•Ethanol margin is defined as Ethanol segment operating income (loss) excluding the LIFO liquidation adjustment, operating expenses (excluding depreciation and amortization expense), depreciation and amortization expense, and other operating expenses, as reflected in the table below.

•Adjusted Refining operating income (loss) is defined as Refining segment operating income (loss) excluding the LIFO liquidation adjustment, the LCM inventory valuation adjustment, and other operating expenses, as reflected in the table below.

•Adjusted Renewable Diesel operating income is defined as Renewable Diesel segment operating income excluding other operating expenses, as reflected in the table below.

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•Adjusted Ethanol operating income (loss) is defined as Ethanol segment operating income (loss) excluding the changes in estimated useful lives of two of our ethanol plants, the LIFO liquidation adjustment, and other operating expenses, as reflected in the table below.

•Adjusted operating income (loss) is defined as total company operating income (loss) excluding the LIFO liquidation adjustment, the LCM inventory valuation adjustment, the changes in estimated useful lives of two of our ethanol plants, and other operating expenses, as reflected in the table below.

(f)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.

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LIQUIDITY AND CAPITAL RESOURCES

Overview

Our liquidity was positively impacted by the cash generated by our operations in 2021 notwithstanding the lingering impacts of the COVID-19 pandemic, excess energy costs arising out of Winter Storm Uri, and the effects of Hurricane Ida, as described in “OVERVIEW AND OUTLOOK—Overview—Business Operations Update.”

We completed debt reduction and refinancing transactions in 2021 that reduced our long-term debt by $1.3 billion. Our refinancing transactions included the issuance of $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 issuances and cash on hand were used to repurchase and retire, or redeem approximately $2.1 billion of various series of our senior notes. In addition, we redeemed our $575 million Floating Rate Senior Notes due September 15, 2023.

In February 2022, we completed additional debt reduction and refinancing transactions that reduced our long-term debt by an additional $750 million. These additional refinancing transactions included the issuance of $650 million of 4.000 percent Senior Notes due June 1, 2052. Proceeds from this issuance and cash on hand were used to repurchase and retire approximately $1.4 billion of various series of our senior notes.

Our Liquidity

Our liquidity consisted of the following as of December 31, 2021 (in millions):

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(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 10 of Notes to Consolidated Financial Statements, the availability under our Canadian Revolver as of December 31, 2021 in Canadian dollars was C$145 million.

(c)Excludes $36 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 10 of Notes to Consolidated Financial Statements.

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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, 2021, all of our ratings on our senior unsecured debt, including debt guaranteed by us, were at or above investment grade level as follows:

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):

Cash Flows for the Year Ended December 31, 2021

In 2021, we used $5.9 billion of cash generated by our operations and $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 on the early redemption and retirement of debt), fund $1.5 billion

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of other financing activities, and increase our available cash on hand by $809 million. The debt issuances, borrowings, and repayments are described in Note 10 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 13 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 19 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, as defined below under “Capital Investments,” of which $1.0 billion related to self-funded capital investments by DGD and $110 million related to capital expenditures of VIEs other than DGD, partially offset by $270 million of proceeds received from the sale of a partial interest in MVP, as described in Note 13 of Notes to Consolidated Financial Statements.

Other financing activities of $1.5 billion consisted primarily of $1.6 billion in dividend payments and $27 million for the purchase of common stock for treasury in connection with stock-based compensation plans, partially offset by $189 million in contributions from noncontrolling interests.

Cash Flows for the Year Ended December 31, 2020

In 2020, we used $948 million of cash generated by our operations and $4.6 billion in debt issuances and borrowings to make $2.4 billion of investments in our business, repay $495 million of debt and finance lease obligations, fund $2.0 billion of other financing activities, and increase our available cash on hand by $730 million. The debt issuances, borrowings, and repayments are described in Note 10 of Notes to Consolidated Financial Statements.

As previously noted, our operations generated $948 million of cash in 2020, which resulted from noncash charges to income of $2.4 billion, partially offset by an unfavorable change in working capital of $345 million. Noncash charges primarily included $2.4 billion of depreciation and amortization expense and $158 million of deferred income tax expense. The change in working capital was affected primarily by a $740 million use of cash4 resulting from the rapid decline in market prices of refined petroleum products and crude oil as a result of the negative economic effects of the COVID-19 pandemic that impacted our receivables and accounts payable. This use of cash, along with other uses of cash, were partially offset by a $1.0 billion source of cash driven by a reduction in inventory levels on hand. Details regarding the components of the change in working capital, along with the reasons for the changes in those components, are described in Note 19 of Notes to Consolidated Financial Statements. In addition, see “RESULTS OF OPERATIONS” for an analysis of the significant components of our net loss.

Our investing activities of $2.4 billion consisted of $2.5 billion in capital investments, of which $548 million related to self-funded capital investments by DGD and $251 million related to capital expenditures of VIEs other than DGD.

4 Represents the net cash flow change in “receivables, net” of $3.3 billion and accounts payable of $4.1 billion during the year ended December 31, 2020, as described in Note 19 of Notes to Consolidated Financial Statements.

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Other financing activities of $2.0 billion consisted primarily of $1.6 billion in dividend payments, $208 million to pay distributions to noncontrolling interests, and $156 million for the purchase of common stock for treasury.

Our Capital Resources

Our material cash requirements as of December 31, 2021 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.

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 governmental 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.

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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, 2022 by nature of the project and reportable segment, along with historical amounts for the years ended December 31, 2021 and 2020 (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.”

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(a)All expected amounts for the year ending December 31, 2022 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):

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We have publicly announced GHG emissions reduction/offset targets for 2025 and 2035. We believe that our expected allocation of growth capital into lower-carbon projects is consistent with such targets. Certain of these lower-carbon projects have been completed or are already in execution and the associated capital investments are included in our expected capital investments for 2022. Our capital investments in future years to achieve these targets are expected to include investments associated with certain lower-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 13 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.

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Contractual Obligations

Below is a summary of our contractual obligations (in millions) as of December 31, 2021 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.

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(a)Debt obligations are described in Note 10 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, 2021.

(c)Operating lease liabilities and finance lease obligations are described in Note 6 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 9 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 11 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.

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The amounts outstanding associated with the debt instruments described below are reflected in current portion of debt and finance lease obligations in our balance sheet as of December 31, 2021, and they are also included in the table above in debt obligations – short-term. However, the final cash flows for these instruments cannot be predicted with certainty at this time for the reasons noted below.

•The $300 million of 4.00 percent Gulf Opportunity Zone Revenue Bonds Series 2010 (GO Zone Bonds) are due December 1, 2040, but they are subject to mandatory tender on June 1, 2022 (the Mandatory Tender Date) at a price equal to par plus accrued and unpaid interest up to, but excluding, the Mandatory Tender Date. However, we have the option to effectuate a remarketing of these bonds, and we currently expect to remarket them effective on or soon after the Mandatory Tender Date or otherwise refinance them, but we cannot provide any assurance that we will be able to do so.

•The IEnova Revolver, as defined and described in Note 10 of Notes to Consolidated Financial Statements, is subject to repayment on demand; however, we do not expect the lender to demand repayment during the next 12 months.

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

On January 23, 2018, our Board authorized the 2018 Program for the purchase of our outstanding common stock. As of December 31, 2021, we had $1.4 billion available for purchase under the 2018 Program, which has no expiration date. We have not purchased any shares of our common stock under the 2018 Program since mid-March 2020, and we will evaluate the timing of repurchases when appropriate. We have no obligation to make purchases under this program.

Pension Plan Funding

We plan to contribute $116 million to our pension plans and $22 million to our other postretirement benefit plans during 2022. See Note 14 of Notes to Consolidated Financial Statements for a discussion of our employee benefit plans.

Environmental Matters

Our operations are subject to extensive environmental regulations by governmental authorities relating to the discharge of materials into the environment, waste management, pollution prevention measures, GHG emissions, and characteristics and composition of 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 in the future. See Note 9 of Notes to Consolidated Financial Statements for disclosure of our environmental liabilities.

Tax Matters

During 2020, we deferred payment on $250 million of value-added and motor fuel taxes that were otherwise due in 2020 as permitted by various taxing authorities to help companies address the negative impacts of the COVID-19 pandemic. We paid $220 million of the deferred amount in 2021 and the remaining $30 million in January 2022.

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Cash Held by Our Foreign Subsidiaries

As of December 31, 2021, $3.3 billion of our cash and cash equivalents was held by our foreign subsidiaries. Cash held by our foreign subsidiaries can be repatriated to us without any U.S. federal income tax consequences on dividends, 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. However, we have accrued for withholding taxes and U.S. state income taxes on a portion of the cash held by certain of our foreign subsidiaries and we believe that the remaining cost is not material to our financial position and liquidity.

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 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—Risks Related to Our Business, Industry, and Operations—Legal, regulatory, and political matters and developments regarding climate change, GHG or other air emissions, fuel efficiency, or the environment may decrease the demand for our petroleum-based products and could adversely affect our performance.”

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

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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 16 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, 2021, we determined there was no impairment of our long-lived assets.

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