UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

þ

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

o

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 1-13175

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)

(210) 345-2000
(Registrant’s telephone number, including area code)

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 þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The number of shares of the registrant’s only class of common stock, $0.01 par value, outstanding as of April 30, 2010 was 565,475,748.

 

 

VALERO ENERGY CORPORATION AND SUBSIDIARIES

INDEX

			Page
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2010 and December 31, 2009				3
Consolidated Statements of Income for the Three Months Ended March 31, 2010 and 2009				4
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2010 and 2009				5
Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2010 and 2009				6
Condensed Notes to Consolidated Financial Statements				7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations				41
Item 3. Quantitative and Qualitative Disclosures About Market Risk				56
Item 4. Controls and Procedures				62
PART II – OTHER INFORMATION
Item 1. Legal Proceedings				63
Item 1A. Risk Factors				64
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds				64
Item 6. Exhibits				65
SIGNATURE				66

PART I – FINANCIAL INFORMATION

VALERO ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(Millions of Dollars, Except Par Value)

		March 31,				December 31,
		2010				2009
		(Unaudited)
ASSETS
Current assets:
Cash and temporary cash investments		$	1,887			$	825
Restricted cash			129				122
Receivables, net			3,947				3,773
Inventories			4,724				4,863
Income taxes receivable			58				888
Deferred income taxes			175				180
Prepaid expenses and other			181				261
Assets held for sale and assets related to discontinued operations			219				224
Total current assets			11,320				11,136
Property, plant and equipment, at cost			29,186				28,463
Accumulated depreciation			(5,851	)			(5,592	)
Property, plant and equipment, net			23,335				22,871
Intangible assets, net			226				227
Deferred charges and other assets, net			1,584				1,395
Total assets		$	36,465			$	35,629
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of debt and capital lease obligations		$	635			$	237
Accounts payable			5,986				5,760
Accrued expenses			502				514
Taxes other than income taxes			604				725
Income taxes payable			22				95
Deferred income taxes			186				253
Liabilities related to discontinued operations			160				225
Total current liabilities			8,095				7,809
Debt and capital lease obligations, less current portion			7,718				7,163
Deferred income taxes			4,131				4,063
Other long-term liabilities			1,855				1,869
Commitments and contingencies
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			7,879				7,896
Treasury stock, at cost; 108,318,528 and 108,798,847 common shares			(6,688	)			(6,721	)
Retained earnings			13,036				13,178
Accumulated other comprehensive income			432				365
Total stockholders’ equity			14,666				14,725
Total liabilities and stockholders’ equity		$	36,465			$	35,629

See Condensed Notes to Consolidated Financial Statements.

VALERO ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
(Millions of Dollars, Except per Share Amounts)
(Unaudited)

		Three Months Ended
		March 31,
		2010				2009
Operating revenues (1)		$	19,643			$	13,328
Costs and expenses:
Cost of sales			18,136				11,204
Operating expenses			912				845
Retail selling expenses			173				169
General and administrative expenses			97				145
Depreciation and amortization expense			357				350
Asset impairment loss			–				22
Total costs and expenses			19,675				12,735
Operating income (loss)			(32	)			593
Other income (expense), net			11				(1	)
Interest and debt expense:
Incurred			(147	)			(119	)
Capitalized			20				39
Income (loss) from continuing operations before income tax expense (benefit)			(148	)			512
Income tax expense (benefit)			(47	)			148
Income (loss) from continuing operations			(101	)			364
Loss from discontinued operations, net of income taxes			(12	)			(55	)
Net income (loss)		$	(113	)		$	309
Earnings (loss) per common share:
Continuing operations		$	(0.18	)		$	0.70
Discontinued operations			(0.02	)			(0.10	)
Total		$	(0.20	)		$	0.60
Weighted-average common shares outstanding (in millions)			562				514
Earnings (loss) per common share – assuming dilution:
Continuing operations		$	(0.18	)		$	0.70
Discontinued operations			(0.02	)			(0.11	)
Total		$	(0.20	)		$	0.59
Weighted-average common shares outstanding – assuming dilution (in millions)			562				519
Dividends per common share		$	0.05			$	0.15
Supplemental information:
(1) Includes excise taxes on sales by our U.S. retail system		$	208			$	204

See Condensed Notes to Consolidated Financial Statements.

VALERO ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions of Dollars)
(Unaudited)

		Three Months Ended
		March 31,
		2010				2009
Cash flows from operating activities:
Net income (loss)		$	(113	)		$	309
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization expense			357				378
Asset impairment loss			–				37
Noncash interest expense and other income, net			(1	)			1
Stock-based compensation expense			12				12
Deferred income tax expense			17				169
Changes in current assets and current liabilities			753				(96	)
Changes in deferred charges and credits and other operating activities, net			(43	)			(29	)
Net cash provided by operating activities			982				781
Cash flows from investing activities:
Capital expenditures			(382	)			(735	)
Deferred turnaround and catalyst costs			(229	)			(167	)
Advance payments related to purchase of ethanol facilities			–				(13	)
Purchase of ethanol facilities			(260	)			–
Other investing activities, net			15				6
Net cash used in investing activities			(856	)			(909	)
Cash flows from financing activities:
Non-bank debt:
Borrowings			1,244				998
Repayments			(294	)			–
Accounts receivable sales program:
Proceeds from sale of receivables			1,225				100
Repayments			(1,225	)			(100	)
Purchase of common stock for treasury			(1	)			–
Issuance of common stock in connection with employee benefit plans			4				1
Benefit from tax deduction in excess of recognized stock-based compensation cost			2				1
Common stock dividends			(28	)			(77	)
Debt issuance costs			(10	)			(7	)
Other financing activities			(1	)			(2	)
Net cash provided by financing activities			916				914
Effect of foreign exchange rate changes on cash			20				(11	)
Net increase in cash and temporary cash investments			1,062				775
Cash and temporary cash investments at beginning of period			825				940
Cash and temporary cash investments at end of period		$	1,887			$	1,715

See Condensed Notes to Consolidated Financial Statements.

VALERO ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Millions of Dollars)
(Unaudited)

		Three Months Ended
		March 31,
		2010				2009
Net income (loss)		$	(113	)		$	309
Other comprehensive income (loss):
Foreign currency translation adjustment			101				(81	)
Pension and other postretirement benefits:
Net gain reclassified into income, net of income tax expense of $- and $-			(1	)			–
Net gain (loss) on derivative instruments designated and qualifying as cash flow hedges:
Net gain (loss) arising during the period, net of income tax (expense) benefit of $1 and $(32)			(1	)			60
Net gain reclassified into income, net of income tax expense of $17 and $21			(32	)			(40	)
Net gain (loss) on cash flow hedges			(33	)			20
Other comprehensive income (loss)			67				(61	)
Comprehensive income (loss)		$	(46	)		$	248

See Condensed Notes to Consolidated Financial Statements.

VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION, PRINCIPLES OF CONSOLIDATION, AND SIGNIFICANT ACCOUNTING POLICIES                                             

As used in this report, the terms “Valero,” “we,” “us,” or “our” may refer to Valero Energy Corporation, one or more of its consolidated subsidiaries, or all of them taken as a whole.

These unaudited consolidated financial statements include the accounts of Valero and subsidiaries in which Valero has a controlling interest. Intercompany balances and transactions have been eliminated in consolidation. Investments in significant non-controlled entities are accounted for using the equity method.

These unaudited consolidated financial statements have been prepared in accordance with United States 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 GAAP for complete consolidated 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. Financial information for the three months ended March 31, 2010 and 2009 included in these Condensed Notes to Consolidated Financial Statements is derived from our unaudited consolidated financial statements. Operating results for the three months ended March 31, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.

The consolidated balance sheet as of December 31, 2009 has been derived from the audited financial statements as of that date. For further information, refer to the consolidated financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2009.

We have evaluated subsequent events that occurred after March 31, 2010 through the filing of this Form 10-Q. Any material subsequent events that occurred during this time have been properly recognized or disclosed in our financial statements.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires our management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. On an ongoing basis, management reviews its estimates based on currently available information. Changes in facts and circumstances may result in revised estimates.

Reclassifications

Certain amounts previously reported have been reclassified to conform to the 2010 presentation.

As discussed in Note 4, we permanently shut down our Delaware City Refinery in the fourth quarter of 2009, and our board of directors approved a plan of sale for our terminal, pipeline, and shutdown refinery assets at Delaware City in the first quarter of 2010. As a result, these assets have been presented in the consolidated balance sheet as assets held for sale and assets of discontinued operations as of March 31, 2010 and December 31, 2009. In addition, the results of operations of the Delaware City Refinery have been presented as discontinued operations in the consolidated statements of income for both periods presented.

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

Asset impairment losses have been presented on a separate line in the 2009 consolidated statement of income. These losses resulted from the cancellation of certain capital projects classified as “construction in progress,” and for the three months ended March 31, 2009, such losses have been reclassified from operating expenses and presented separately. The asset impairment losses are also presented on a separate line in the consolidated statements of cash flows, which resulted in an adjustment to “changes in deferred charges and credits and other operating activities, net” previously reported for the three months ended March 31, 2009. Asset impairment losses presented in the consolidated statements of cash flows includes asset impairment losses associated with the Delaware City Refinery. Such losses, however, are included in discontinued operations in the consolidated statements of income.

2. ACCOUNTING PRONOUNCEMENTS

Transfers of Financial Assets

In June 2009, Topic 860 of the Accounting Standards Codification (the Codification, or ASC), “Transfers and Servicing,” was modified to clarify the requirements for derecognizing transferred financial assets, remove the concept of a qualifying special-purpose entity and related exceptions, and require additional disclosures related to transfers of financial assets. This guidance was effective for fiscal years, and interim periods within those fiscal years, beginning after November 15, 2009, and earlier application was prohibited. The adoption of these provisions of ASC Topic 860 effective January 1, 2010 did not affect our financial position or results of operations.

Variable Interest Entities

In June 2009, ASC Topic 810, “Consolidation,” was amended to modify provisions related to variable interest entities to include entities previously considered qualifying special-purpose entities, as the concept of these entities was eliminated. This modification also clarifies consolidation requirements and expands disclosure requirements related to variable interest entities. These provisions of ASC Topic 810 were effective for fiscal years, and interim periods within those fiscal years, beginning after November 15, 2009, and earlier application was prohibited. The adoption of these provisions of ASC Topic 810 effective January 1, 2010 did not affect our financial position or results of operations.

3. ACQUISITIONS

The acquired ethanol businesses discussed below involve the production and marketing of ethanol and its co-products, including distillers grains. The operations of our ethanol business complement our existing clean motor fuels business.

Acquisitions of ASA and Renew Assets

In December 2009, we signed an agreement with ASA Ethanol Holdings, LLC (ASA) to buy two ethanol plants located in Linden, Indiana and Bloomingburg, Ohio and made a $20 million advance payment towards the purchase of these facilities. On January 13, 2010, we completed the acquisition of the facilities, including certain inventories, for a total purchase price of $202 million.

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

Also in December 2009, we received approval from a bankruptcy court to acquire an ethanol facility located near Jefferson, Wisconsin from Renew Energy LLC (Renew) and made a $1 million advance payment towards the purchase of this facility. We completed the acquisition of this facility, including certain receivables and inventories, on February 4, 2010 for a total purchase price of $79 million.

The assets acquired from ASA and Renew have been recognized at estimated acquisition-date fair values as determined by preliminary independent appraisals and other evaluations as follows (in millions):

Current assets, primarily inventory		$	11
Property, plant and equipment			270
Total consideration		$	281

Neither goodwill nor a gain from a bargain purchase is expected to be recognized in conjunction with the ASA and Renew acquisitions, and no contingent assets or liabilities were acquired or assumed. In addition, pro forma results of operations for the three months ended March 31, 2010 have not been presented for these acquisitions as the acquisitions were not material to our financial position or results of operations. The consolidated statement of income for the three months ended March 31, 2010 includes the results of the ASA and Renew acquisitions as of their respective acquisition dates in the first quarter of 2010.

Acquisition of VeraSun Assets

In the second quarter of 2009, we acquired seven ethanol plants and a site under development from VeraSun Energy Corporation (VeraSun). The acquisition of these ethanol plants (referred to as the VeraSun Acquisition) was completed under three separate closing transactions. The purchase price for the VeraSun Acquisition was $477 million plus $79 million primarily for inventory and certain other working capital.

An independent appraisal of the assets acquired in the VeraSun Acquisition was completed, and the assets acquired and the liabilities assumed have been recognized at their acquisition-date fair values as determined by the appraisal and other evaluations as follows (in millions):

Current assets, primarily inventory		$	77
Property, plant and equipment			491
Identifiable intangible assets			1
Current liabilities			(10	)
Other long-term liabilities			(3	)
Total consideration		$	556

Neither goodwill nor a gain from a bargain purchase was recognized in conjunction with the VeraSun Acquisition, and no significant contingent assets or liabilities were acquired or assumed in the acquisition.

The consolidated statements of income include the results of operations of the VeraSun Acquisition commencing on the respective closing dates in the second quarter of 2009. As a result, pro forma information for the three months ended March 31, 2010 has not been presented since the results of operations of the VeraSun Acquisition have been included in our actual consolidated results of operations for the entire period. The pro forma information presented below for the three months ended March 31, 2009 assumes that the purchase price was funded with proceeds from the issuance of $556 million of debt

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

on January 1, 2009. The consolidated pro forma operating revenues, net income, and earnings per common share – assuming dilution of the combined entity for the three months ended March 31, 2009 had the VeraSun Acquisition occurred on January 1, 2009 are shown in the table below (in millions, except per share amounts). The pro forma financial information is not necessarily indicative of the results of future operations.

		Three Months Ended
		March 31, 2009
Consolidated pro forma:
Operating revenues		$	13,551
Income from continuing operations			358
Earnings per common share from continuing operations – assuming dilution			0.69

4. ASSETS HELD FOR SALE AND ASSETS AND LIABILITIES OF DISCONTINUED OPERATIONS

On November 20, 2009, we announced the permanent shutdown of our Delaware City Refinery due to financial losses caused by poor economic conditions, significant capital spending requirements, and high operating costs. In the fourth quarter of 2009, we recorded a pre-tax loss of $1.9 billion, of which $1.4 billion represented the write-down of the book value of the refinery assets to net realizable value. The results of operations of the Delaware City Refinery have been presented as discontinued operations in the consolidated statements of income for both periods presented because of the permanent shutdown of the refinery. Certain terminal and pipeline assets previously associated with the refinery were not shut down and have continued to be operated, with the results of their operations reflected in continuing operations in the consolidated statements of income for both periods presented.

In the first quarter of 2010, our board of directors approved a plan of sale for our terminal, pipeline, and shutdown refinery assets at Delaware City. On April 7, 2010, we entered into an agreement to sell those assets to wholly owned subsidiaries of PBF Energy Partners LP (PBF) for $220 million in proceeds. The transaction is expected to close during the second quarter of 2010, subject to regulatory approvals, as well as finalization of certain agreements with the state of Delaware. As a result, the shutdown Delaware City Refinery assets and the associated terminal and pipeline assets have been presented in the consolidated balance sheets within assets held for sale and assets related to discontinued operations as of March 31, 2010 and December 31, 2009. All other related assets, consisting primarily of accounts receivable and certain inventories, and liabilities of the shutdown Delaware City Refinery that will not be sold are also presented as assets and liabilities related to discontinued operations as of March 31, 2010 and December 31, 2009. The nature and significance of our post-closing participation in the terminalling agreement described below represents a continuation of activities with the terminal operations of the Delaware City Refinery for accounting purposes, and as such the results of operations related to these terminal operations have not been presented as discontinued operations in the consolidated statements of income for any of the periods presented.

In connection with this sale, we will enter into a terminalling and offtake agreement with PBF under which PBF will provide certain terminalling services including receipt, storage, handling, and redelivery of refined products for us. If PBF resumes refinery operations, the terminalling agreement will terminate and we will purchase certain off-take products as prescribed in the agreement. The initial term of this

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

agreement is for one year and shall automatically renew for 180-day periods until terminated by either party.

Financial information related to the assets held for sale and the assets and liabilities related to the discontinued operations is summarized as follows (in millions):

		March 31, 2010
						Assets and
						Liabilities
		Assets				Related to
		Held				Discontinued
		for Sale				Operations				Total
Current assets:
Receivables, net		$	–			$	7			$	7
Inventories			–				4				4
Property, plant and equipment, net:
Refinery			16				–				16
Terminal and pipeline			140				–				140
Deferred income taxes			–				52				52
Current assets		$	156			$	63			$	219
Current liabilities:
Accounts payable		$	–			$	59			$	59
Accrued expenses			–				101				101
Current liabilities		$	–			$	160			$	160
		December 31, 2009
						Assets and
						Liabilities
		Assets				Related to
		Held				Discontinued
		for Sale				Operations				Total
Current assets:
Receivables, net		$	–			$	6			$	6
Inventories			–				4				4
Property, plant and equipment, net:
Refinery			16				–				16
Terminal and pipeline			141				–				141
Deferred income taxes			–				57				57
Current assets		$	157			$	67			$	224
Current liabilities:
Accounts payable		$	–			$	90			$	90
Accrued expenses			–				135				135
Current liabilities		$	–			$	225			$	225

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

Results of operations for the Delaware City Refinery are summarized as follows (in millions):

		Three Months Ended March 31,
		2010				2009
Operating revenues		$	–			$	496
Loss before income tax benefit			(26	)			(85	)

5. IMPAIRMENTS

Due to the economic slowdown that persisted throughout 2009 and its negative impact on the refining industry, we evaluated our refining operating assets for potential impairment in 2009. Such evaluations were based on expected future cash flows for each of our refineries using significant estimates and assumptions about the future operations of those refineries, including overall throughput volumes, types of crude oil processed, types of products produced, and prices for crude oil and refined products. Prices for crude oil and refined products fluctuate significantly based on market factors, including geopolitical matters. Prices, in turn, impact refinery throughput assumptions. In addition, we considered matters specific to our Aruba Refinery and Paulsboro Refinery to develop expected future cash flows for those refineries. We determined that there was no indication of potential impairment of our refining operating assets as of December 31, 2009.

While the economy and refining industry fundamentals improved during the first quarter of 2010, refining industry fundamentals continued to be negatively impacted by the economic slowdown. As a result, we updated our evaluation of potential impairments of our refining operating assets as of March 31, 2010, and we determined that there was no indication of impairment. Our cash flow estimates are based on our continued expectation of improved refined product prices resulting from an expected improvement in the worldwide economy, and we updated our assumptions related to matters specific to our Aruba and Paulsboro Refineries that impact expected future cash flows for those refineries. We believe that our estimates used to develop expected cash flows are reasonable; however, future cash flows will differ from our estimates and such differences may be material. The sensitivity of our estimates is most significant with respect to our Aruba and Paulsboro Refineries. Therefore, should prices fail to improve as expected or other factors occur that impact our expectations regarding these refineries, we may determine that either or both refineries are impaired, and the resulting impairment loss could be material to our results of operations.

For further information regarding impairments, see Note 3 of Notes to Consolidated Financial Statements included in our annual report on Form 10-K for the year ended December 31, 2009.

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

6. INVENTORIES

Inventories consisted of the following (in millions):

		March 31,				December 31,
		2010				2009
Refinery feedstocks		$	2,549			$	2,124
Refined products and blendstocks			1,710				2,317
Ethanol feedstocks and products			183				141
Convenience store merchandise			93				96
Materials and supplies			189				185
Inventories		$	4,724			$	4,863

As of March 31, 2010 and December 31, 2009, the replacement cost (market value) of LIFO inventories exceeded their LIFO carrying amounts by approximately $4.9 billion and $4.5 billion, respectively.

7. DEBT

Non-Bank Debt
In March 2009, we issued $750 million of 9.375% notes due March 15, 2019 and $250 million of 10.5% notes due March 15, 2039. Proceeds from the issuance of these notes totaled approximately $998 million, before deducting underwriting discounts and other issuance costs of $8 million.

In February 2010, we issued $400 million of 4.50% notes due in February 2015 and $850 million of 6.125% notes due in February 2020. Proceeds from the issuance of these notes totaled approximately $1.24 billion, before deducting underwriting discounts of $8 million.

On March 15, 2010, we redeemed our 7.50% senior notes with a maturity date of June 15, 2015 for $294 million, or 102.5% of stated value. These notes had a carrying amount of $296 million as of the redemption date, resulting in a $2 million gain that was included in “other income (expense), net” in the consolidated statement of income.

In March 2010, we called for redemption our 6.75% senior notes with a maturity date of May 1, 2014 for $190 million, or 102.25% of stated value. The redemption date was May 3, 2010. These notes had a carrying amount of $187 million as of the redemption date, resulting in a loss on the redemption of approximately $3 million.

Bank Credit Facilities
We have a revolving credit facility (the Revolver) that has a maturity date of November 2012. As of March 31, 2010, the Revolver had a borrowing capacity of $2.4 billion. The Revolver has certain restrictive covenants, including a maximum debt-to-capitalization ratio of 60%. As of March 31, 2010 and December 31, 2009, our debt-to-capitalization ratios, calculated in accordance with the terms of the Revolver, were 30.6% and 30.9%, respectively. We believe that we will remain in compliance with this covenant.

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

During the three months ended March 31, 2010, we had no borrowings or repayments under our Revolver or other revolving bank credit facilities. As of March 31, 2010 and December 31, 2009, we had no borrowings outstanding under these committed revolving credit facilities.

As of March 31, 2010 and December 31, 2009, we had $242 million and $259 million, respectively, of letters of credit outstanding under our uncommitted short-term bank credit facilities and $329 million and $299 million, respectively, of letters of credit outstanding under our U.S. committed revolving credit facilities. Under our Canadian committed revolving credit facility, we had Cdn. $22 million of letters of credit outstanding as of both March 31, 2010 and December 31, 2009.

Accounts Receivable Sales Facility
We have an accounts receivable sales facility with a group of third-party entities and financial institutions to sell on a revolving basis up to $1 billion of eligible trade receivables. We amended our agreement in June 2009 to extend the maturity date to June 2010. As of December 31, 2009, the amount of eligible receivables sold to the third-party entities and financial institutions was $200 million. During the quarter ended March 31, 2010, we sold and repaid $1.2 billion of eligible receivables to the third-party entities and financial institutions. As of March 31, 2010, the amount of eligible receivables sold to the third-party entities and financial institutions was $200 million. Proceeds from the sale of receivables under this facility are reflected as debt in our consolidated balance sheets.

Other Disclosures
The estimated fair value of our debt, including current portion, was as follows (in millions):

		March 31,				December 31,
		2010				2009
Carrying amount		$	8,313			$	7,364
Fair value			9,329				8,228

8. STOCKHOLDERS’ EQUITY

Treasury Stock
No significant purchases of our common stock were made during the three months ended March 31, 2010 and 2009. During the three months ended March 31, 2010 and 2009, we issued 0.5 million and 0.2 million shares from treasury, respectively, for our employee benefit plans.

Common Stock Dividends
On April 29, 2010, our board of directors declared a regular quarterly cash dividend of $0.05 per common share payable on June 16, 2010 to holders of record at the close of business on May 19, 2010.

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

9. EARNINGS (LOSS) PER COMMON SHARE

Earnings (loss) per common share amounts were computed as follows (dollars and shares in millions, except per share amounts):

		Three Months Ended March 31,
		2010								2009
		Restricted				Common				Restricted				Common
		Stock				Stock				Stock				Stock
Earnings (loss) per common share from continuing operations:
Income (loss) from continuing operations						$	(101	)						$	364
Less dividends paid:
Common stock							28								77
Nonvested restricted stock							–								–
Undistributed earnings (loss)						$	(129	)						$	287
Weighted-average common shares outstanding			3				562				2				514
Earnings (loss) per common share from continuing operations:
Distributed earnings		$	0.05			$	0.05			$	0.15			$	0.15
Undistributed earnings (loss)			–				(0.23	)			0.55				0.55
Total earnings (loss) per common share from continuing operations		$	0.05			$	(0.18	)		$	0.70			$	0.70
Earnings (loss) per common share from continuing operations – assuming dilution:
Income (loss) from continuing operations						$	(101	)						$	364
Weighted-average common shares outstanding							562								514
Common equivalent shares (1):
Stock options							–								4
Performance awards and other benefit plans							–								1
Weighted-average common shares outstanding – assuming dilution							562								519
Earnings (loss) per common share from continuing operations – assuming dilution						$	(0.18	)						$	0.70

(1)		Common equivalent shares were excluded from the computation of diluted loss per share for the three months ended March 31, 2010 because the effect of including such shares would be antidilutive.

The following table reflects potentially dilutive securities that were excluded from the calculation of “earnings (loss) per common share from continuing operations – assuming dilution” as the effect of including such securities would have been antidilutive (in millions). For the three months ended March 31, 2010, common equivalent shares, which represent primarily stock options, were excluded as a

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

result of the net loss reported for the first quarter of 2010. In addition, for both periods, certain stock option amounts presented below were excluded, representing outstanding stock options for which the exercise prices were greater than the average market price of the common shares during each respective reporting period.

		Three Months Ended March 31,
		2010				2009
Common equivalent shares			5				–
Stock options			14				10

10. SUPPLEMENTAL CASH FLOW INFORMATION

In order to determine net cash provided by operating activities, net income is adjusted by, among other things, changes in current assets and current liabilities as follows (in millions):

		Three Months Ended March 31,
		2010				2009
Decrease (increase) in current assets:
Restricted cash		$	(7	)		$	(8	)
Receivables, net			(189	)			(245	)
Inventories			168				(50	)
Income taxes receivable			830				117
Prepaid expenses and other			39				(90	)
Increase (decrease) in current liabilities:
Accounts payable			155				231
Accrued expenses			(47	)			35
Taxes other than income taxes			(126	)			(86	)
Income taxes payable			(70	)			–
Changes in current assets and current liabilities		$	753			$	(96	)

The above changes in current assets and current liabilities differ from changes between amounts reflected in the applicable consolidated balance sheets for the respective periods for the following reasons:

	•		the amounts shown above exclude changes in cash and temporary cash investments, deferred income taxes, and current portion of debt and capital lease obligations, as well as the effect of certain noncash investing and financing activities discussed below;
	•		amounts accrued for capital expenditures and deferred turnaround and catalyst costs are reflected in investing activities in the consolidated statements of cash flows when such amounts are paid;
	•		amounts accrued for common stock purchases in the open market that are not settled as of the balance sheet date are reflected in financing activities in the consolidated statements of cash flows when the purchases are settled and paid;
	•		changes in assets and liabilities related to the discontinued operations of the Delaware City Refinery prior to its shutdown are reflected in the line items to which the changes relate in the table above; and
	•		certain differences between consolidated balance sheet changes and consolidated statement of cash flow changes reflected above result from translating foreign currency denominated amounts at different exchange rates.

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

There were no significant noncash investing or financing activities for the three months ended March 31, 2010 and 2009.

Cash flows related to the discontinued operations of the Delaware City Refinery have been combined with the cash flows from continuing operations within each category in the consolidated statements of cash flows for both periods presented and are summarized as follows (in millions):

		Three Month Ended March 31,
		2010				2009
Cash used in operating activities		$	(12	)		$	(42	)
Cash used in investing activities			–				(34	)

Cash flows related to interest and income taxes were as follows (in millions):

		Three Months Ended March 31,
		2010				2009
Interest paid in excess of (less than) amount capitalized		$	56			$	(19	)
Income taxes paid (net of tax refunds received)			(839	)			(168	)

11. FAIR VALUE MEASUREMENTS

A fair value hierarchy (Level 1, Level 2, or Level 3) is used to categorize fair value amounts based on the quality of inputs used to measure fair value. Accordingly, fair values determined by Level 1 inputs utilize quoted prices in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs are based on quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. We use appropriate valuation techniques based on the available inputs to measure the fair values of our applicable assets and liabilities. When available, we measure fair value using Level 1 inputs because they generally provide the most reliable evidence of fair value.

The tables below present information (dollars in millions) about our financial assets and liabilities measured and recorded at fair value on a recurring basis and indicate the fair value hierarchy of the inputs utilized by us to determine the fair values as of March 31, 2010 and December 31, 2009.

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

Fair Value Measurements Using

Quoted

Significant

Prices

Other

Significant

in Active

Observable

Unobservable

Markets

Inputs

Inputs

Total as of

(Level 1)

(Level 2)

(Level 3)

March 31, 2010

Assets:

Commodity derivative contracts

$

30

$

235

$

–

$

265

Nonqualified benefit plans

102

–

10

112

Liabilities:

Commodity derivative contracts

84

10

–

94

Certain nonqualified benefit plans

33

–

–

33

Fair Value Measurements Using

Quoted

Significant

Prices

Other

Significant

in Active

Observable

Unobservable

Total as of

Markets

Inputs

Inputs

December 31,

(Level 1)

(Level 2)

(Level 3)

2009

Assets:

Commodity derivative contracts

$

10

$

349

$

–

$

359

Nonqualified benefit plans

99

–

10

109

Liabilities:

Commodity derivative contracts

100

9

–

109

Certain nonqualified benefit plans

34

–

–

34

The valuation methods used to measure our financial instruments at fair value are as follows:

	•		Commodity derivative contracts, consisting primarily of exchange-traded futures and swaps, are measured at fair value using the market approach. Exchange-traded futures are valued based on quoted prices from the exchange and are categorized in Level 1 of the fair value hierarchy. Swaps are priced using third-party broker quotes, industry pricing services, and exchange-traded curves, with appropriate consideration of counterparty credit risk, but since they have contractual terms that are not identical to exchange-traded futures instruments with a comparable market price, these financial instruments are categorized in Level 2 of the fair value hierarchy.
	•		The nonqualified benefit plan assets and certain nonqualified benefit plan liabilities categorized in Level 1 of the fair value hierarchy are measured at fair value using a market approach based on quotations from national securities exchanges. The nonqualified benefit plan assets categorized in Level 3 of the fair value hierarchy represent insurance contracts, the fair values of which are provided by the insurer.

As of March 31, 2010, our obligation to pay cash collateral to brokers under master netting arrangements of $25 million was netted against the fair value of the commodity derivatives reflected in Level 1. As of December 31, 2009, cash received from brokers of $64 million, resulting from the equity in broker accounts covered by master netting arrangements exceeding the minimum margin requirements for such accounts, was netted against the fair value of the commodity derivatives reflected in Level 1. Certain of our commodity derivative contracts under master netting arrangements include both asset and liability

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

positions. We have elected to offset the fair value amounts recognized for multiple similar derivative instruments executed with the same counterparty, including any related cash collateral asset or obligation.

The following is a reconciliation of the beginning and ending balances (in millions) for fair value measurements developed using significant unobservable inputs for the three months ended March 31, 2010 and 2009.

		Three Months Ended March 31,
		2010				2009
Balance at beginning of period		$	10			$	13
Net unrealized gains included in earnings			–				11
Balance at end of period		$	10			$	24

Unrealized gains for the three months ended March 31, 2009, which are reported in “other income (expense), net” in the consolidated statement of income, related to the three-year earn-out agreement with Alon Refining Krotz Springs Inc. (Alon) that was entered into in connection with the sale of our Krotz Springs Refinery and was settled in August 2009. These unrealized gains were offset by the recognition in “other income (expense), net” of losses on derivative instruments entered into to hedge the risk of changes in the fair value of the Alon earn-out agreement.

12. PRICE RISK MANAGEMENT ACTIVITIES

We are exposed to market risks related to the volatility in the price of commodities, interest rates and foreign currency exchange rates, and we enter into derivative instruments to manage those risks. We also enter into derivative instruments to manage the price risk on other contractual derivatives into which we have entered. The only types of derivative instruments we enter into are those related to the various commodities we purchase or produce, interest rate swaps, and foreign currency exchange and purchase contracts, as described below. All derivative instruments are recorded on our balance sheet as either assets or liabilities measured at their fair values.

When we enter into a derivative instrument, it is designated as a fair value hedge, a cash flow hedge, an economic hedge, or a trading activity. The gain or loss on a derivative instrument designated and qualifying as a fair value hedge, as well as the offsetting loss or gain on the hedged item attributable to the hedged risk, are recognized currently in income in the same period. The effective portion of the gain or loss on a derivative instrument designated and qualifying as a cash flow hedge is initially reported as a component of other comprehensive income and is then recorded in income in the period or periods during which the hedged forecasted transaction affects income. The ineffective portion of the gain or loss on the cash flow derivative instrument, if any, is recognized in income as incurred. For our economic hedging relationships (hedges not designated as fair value or cash flow hedges) and for derivative instruments entered into by us for trading purposes, the derivative instrument is recorded at fair value and changes in the fair value of the derivative instrument are recognized currently in income. The cash flow effects of all of our derivative contracts are reflected in operating activities in the consolidated statements of cash flows for both periods presented.

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

Commodity Price Risk
We are exposed to market risks related to the price of crude oil, refined products (primarily gasoline and distillate), grain (primarily corn), and natural gas used in our refining operations. To reduce the impact of price volatility on our results of operations and cash flows, we use commodity derivative instruments, including swaps, futures, and options. We use the futures markets for the available liquidity, which provides greater flexibility in transacting our hedging and trading operations. We use swaps primarily to convert our floating price exposure to a fixed price. Our positions in commodity derivative instruments are monitored and managed on a daily basis by a risk control group to ensure compliance with our stated risk management policy that has been approved by our board of directors.

For risk management purposes, we use fair value hedges, cash flow hedges, and economic hedges. In addition to the use of derivative instruments to manage commodity price risk, we also enter into certain commodity derivative instruments for trading purposes. Our objective for entering into each type of hedge or trading activity is described below.

Fair Value Hedges
Fair value hedges are used to hedge certain refining inventories and firm commitments to purchase inventories. The level of activity for our fair value hedges is based on the level of our operating inventories, and generally represents the amount by which our inventories differ from our previous year-end LIFO inventory levels.

As of March 31, 2010, we had the following outstanding commodity derivative instruments that were entered into to hedge crude oil and refined product inventories. The information presents the notional volume of outstanding contracts by type of instrument and year of maturity (volumes in thousands of barrels).

		Notional
Derivative Instrument / Maturity		Contract Volumes
Futures – short:
2010 (crude oil)			12,036

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

Cash Flow Hedges
Cash flow hedges are used to hedge certain forecasted feedstock and product purchases, refined product sales, and natural gas purchases. The objective of our cash flow hedges is to lock in the price of forecasted feedstock, product, or natural gas purchases or refined product sales at existing market prices that are deemed favorable by management.

As of March 31, 2010, we had the following outstanding commodity derivative instruments that were entered into to hedge forecasted purchases or sales of crude oil and refined products. The information presents the notional volume of outstanding contracts by type of instrument and year of maturity (volumes in thousands of barrels).

		Notional
Derivative Instrument / Maturity		Contract Volumes
Swaps – long:
2010 (crude oil)			11,925
2010 (distillate)			20,025
Swaps – short:
2010 (crude oil)			11,925
2010 (distillate)			20,025
Futures – long:
2010 (crude oil)			89

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

Economic Hedges
Economic hedges are hedges not designated as fair value or cash flow hedges that are used to (i) manage price volatility in certain refinery feedstock, refined product, and corn inventories, and (ii) manage price volatility in certain forecasted refinery feedstock, product, and corn purchases, refined product sales, and natural gas purchases. Our objective in entering into economic hedges is consistent with the objectives discussed above for fair value hedges and cash flow hedges. However, the economic hedges are not designated as a fair value hedge or a cash flow hedge for accounting purposes, usually due to the difficulty of establishing the required documentation at the date that the derivative instrument is entered into that would allow us to achieve “hedge deferral accounting.”

As of March 31, 2010, we had the following outstanding commodity derivative instruments that were entered into as economic hedges. The information presents the notional volume of outstanding contracts by type of instrument and year of maturity (volumes in thousands of barrels, except those identified as corn contracts that are presented in thousands of bushels).

		Notional
Derivative Instrument / Maturity		Contract Volumes
Swaps – long:
2010 (crude oil)			82,679
2010 (distillate)			39,621
2010 (gasoline)			8,475
2011 (crude oil)			48,600
2011 (distillate)			5,850
2011 (gasoline)			4,950
Swaps – short:
2010 (crude oil)			63,691
2010 (distillate)			54,114
2010 (gasoline)			11,475
2011 (crude oil)			48,600
2011 (distillate)			5,850
2011 (gasoline)			4,950
Futures – long:
2010 (crude oil)			150,251
2010 (distillate)			63,635
2010 (gasoline)			26,501
2010 (corn)			6,070
2011 (distillate)			66
2011 (corn)			150
Futures – short:
2010 (crude oil)			142,324
2010 (distillate)			52,155
2010 (gasoline)			45,238
2010 (corn)			25,255
2011 (corn)			860
Options – long:
2010 (distillate)			6

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

Trading Activities
Derivatives entered into for trading activities represent commodity derivative instruments held or issued for trading purposes. Our objective in entering into commodity derivative instruments for trading purposes is to take advantage of existing market conditions related to crude oil and refined products that management perceives as opportunities to benefit our results of operations and cash flows, but for which there are no related physical transactions.

As of March 31, 2010, we had the following outstanding commodity derivative instruments that were entered into for trading purposes. The information presents the notional volume of outstanding contracts by type of instrument and year of maturity (volumes represent thousands of barrels, except those identified as natural gas contracts that are presented in billions of British thermal units).

		Notional
Derivative Instrument / Maturity		Contract Volumes
Swaps – long:
2010 (crude oil)			13,188
2010 (distillate)			19,853
2010 (gasoline)			9,330
2011 (crude oil)			2,565
2011 (distillate)			600
2011 (gasoline)			3,000
Swaps – short:
2010 (crude oil)			12,930
2010 (distillate)			19,886
2010 (gasoline)			9,555
2011 (crude oil)			2,250
2011 (distillate)			915
2011 (gasoline)			3,000
Futures – long:
2010 (crude oil)			20,561
2010 (distillate)			19,179
2010 (gasoline)			7,454
2010 (natural gas)			310
2011 (crude oil)			1,040
2011 (distillate)			10
Futures – short:
2010 (crude oil)			22,334
2010 (distillate)			19,121
2010 (gasoline)			7,307
2010 (natural gas)			310
2011 (crude oil)			950
2011 (distillate)			70
Options – long:
2010 (crude oil)			3,136
Options – short:
2010 (crude oil)			5,136

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

Interest Rate Risk
Our primary market risk exposure for changes in interest rates relates to our debt obligations. We manage our exposure to changing interest rates through the use of a combination of fixed-rate and floating-rate debt. In addition, we have at times used interest rate swap agreements to manage our fixed to floating interest rate position by converting certain fixed-rate debt to floating-rate debt. These interest rate swap agreements are generally accounted for as fair value hedges. However, we have not had any outstanding interest rate swap agreements since 2006.

Foreign Currency Risk
We are exposed to exchange rate fluctuations on transactions related to our Canadian operations. To manage our exposure to these exchange rate fluctuations, we use foreign currency exchange and purchase contracts. These contracts are not designated as hedging instruments for accounting purposes, and therefore they are classified as economic hedges. As of March 31, 2010, we had commitments to purchase $189 million of U.S. dollars. These commitments matured on or before April 16, 2010, resulting in a $1 million loss in the second quarter of 2010.

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

Fair Values of Derivative Instruments
The following tables provide information about the fair values of our derivative instruments as of March 31, 2010 and December 31, 2009 (in millions) and the line items in the balance sheet in which the fair values are reflected. See Note 11 for additional information related to the fair values of our derivative instruments. As indicated in Note 11, we net fair value amounts recognized for multiple similar derivative instruments executed with the same counterparty under master netting arrangements. The tables below, however, are presented on a gross asset and gross liability basis, which results in the reflection of certain assets in liability accounts and certain liabilities in asset accounts. In addition, in Note 11 we netted cash collateral payable to brokers and cash received from brokers against the fair value of the commodity derivatives; these cash amounts are not reflected in the tables below.

		Asset Derivatives						Liability Derivatives
				Fair Value						Fair Value
				as of						as of
		Balance Sheet		March 31,				Balance Sheet		March 31,
		Location		2010				Location		2010
Derivatives designated as hedging instruments
Commodity contracts:
Futures		Receivables, net		$	2			Receivables, net		$	32
Futures		Accrued expenses			35			Accrued expenses			64
Swaps		Receivables, net			254			Receivables, net			224
Swaps		Prepaid expenses and other			353			Prepaid expenses and other			238
Swaps		Accrued expenses			7			Accrued expenses			6
Total derivatives designated as hedging instruments				$	651					$	564
Derivatives not designated as hedging instruments
Commodity contracts:
Futures		Receivables, net		$	49			Receivables, net		$	32
Futures		Accrued expenses			2,092			Accrued expenses			2,128
Swaps		Receivables, net			424			Receivables, net			321
Swaps		Prepaid expenses and other			869			Prepaid expenses and other			882
Swaps		Accrued expenses			8			Accrued expenses			20
Total derivatives not designated as hedging instruments				$	3,442					$	3,383
Total derivatives				$	4,093					$	3,947

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

		Asset Derivatives						Liability Derivatives
				Fair Value						Fair Value
				as of						as of
		Balance Sheet		December 31,				Balance Sheet		December 31,
		Location		2009				Location		2009
Derivatives designated as hedging instruments
Commodity contracts:
Futures		Receivables, net		$	1			Receivables, net		$	2
Futures		Accrued expenses			13			Accrued expenses			37
Swaps		Receivables, net			308			Receivables, net			271
Swaps		Prepaid expenses and other			579			Prepaid expenses and other			415
Swaps		Accrued expenses			28			Accrued expenses			19
Total derivatives designated as hedging instruments				$	929					$	744
Derivatives not designated as hedging instruments
Commodity contracts:
Futures		Receivables, net		$	34			Receivables, net		$	29
Futures		Accrued expenses			2,094			Accrued expenses			2,101
Swaps		Receivables, net			506			Receivables, net			370
Swaps		Prepaid expenses and other			1,049			Prepaid expenses and other			1,037
Swaps		Accrued expenses			46			Accrued expenses			62
Options		Accrued expenses			–			Accrued expenses			1
Total derivatives not designated as hedging instruments				$	3,729					$	3,600
Total derivatives				$	4,658					$	4,344

Market and Counterparty Risk
Our price risk management activities involve the receipt or payment of fixed price commitments into the future. These transactions give rise to market risk, the risk that future changes in market conditions may make an instrument less valuable. We closely monitor and manage our exposure to market risk on a daily basis in accordance with policies approved by our board of directors. Market risks are monitored by a risk control group to ensure compliance with our stated risk management policy. Concentrations of customers in the refining industry may impact our overall exposure to counterparty risk, in that these customers may be similarly affected by changes in economic or other conditions. In addition, financial services companies are the counterparties in certain of our price risk management activities, and such financial services companies may be adversely affected by periods of uncertainty and illiquidity in the credit and capital markets.

As of March 31, 2010, we had net receivables related to derivative instruments of $19 million from counterparties in the refining industry and $83 million from counterparties in the financial services industry. As of December 31, 2009, we had net receivables related to derivative instruments of $19 million from counterparties in the refining industry and $157 million from counterparties in the

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

financial services industry. These amounts represent the aggregate amount payable to us by companies in those industries, reduced by payables from us to those companies under master netting arrangements that allow for the setoff of amounts receivable from and payable to the same party. We do not require any collateral or other security to support derivative instruments into which we enter. We also do not have any derivative instruments that require us to maintain a minimum investment-grade credit rating.

Effect of Derivative Instruments on Statements of Income and Other Comprehensive Income
The following tables provide information about the gain or loss recognized in income and other comprehensive income on our derivative instruments for the three months ended March 31, 2010 and 2009 (in millions), and the line items in the financial statements in which such gains and losses are reflected.

		Location of		Amount of								Location of		Amount of								Amount of
Derivatives in		Gain or (Loss)		Gain or (Loss)								Gain or (Loss)		Gain or (Loss)								Gain or (Loss)
Fair Value		Recognized in		Recognized in								Recognized in		Recognized								Recognized in Income
Hedging		Income on		Income on								Income on		in Income on								for Ineffective Portion
Relationships		Derivatives		Derivatives								Hedged Item		Hedged Item								of Derivative (1)
				Three Months										Three Months								Three Months
				Ended March 31,										Ended March 31,								Ended March 31,
				2010				2009						2010				2009				2010				2009
Commodity contracts		Cost of sales		$	(17	)		$	(15	)		Cost of sales		$	16			$	15			$	(1	)		$	–
Total				$	(17	)		$	(15	)				$	16			$	15			$	(1	)		$	–

Location of

Gain or (Loss)

Location of

Amount of

Reclassified from

Amount of

Gain or (Loss)

Amount of

Gain or (Loss)

Accumulated

Gain or (Loss)

Recognized in

Gain or (Loss)

Derivatives in

Recognized in

OCI

Reclassified from

Income on

Recognized in

Cash Flow

OCI on

into Income

Accumulated OCI

Derivatives

Income on

Hedging

Derivatives

(Effective

into Income

(Ineffective

Derivatives

Relationships

(Effective Portion)

Portion)

(Effective Portion)

Portion)

(Ineffective Portion) (1)

Three Months

Three Months

Three Months

Ended

Ended

Ended

March 31,

March 31,

March 31

2010

2009

2010

2009

2010

2009

Commodity contracts (2)

$

(2

)

$

92

Cost of sales

$

49

$

61

Cost of sales

$

–

$

–

Total

$

(2

)

$

92

$

49

$

61

$

–

$

–

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

		Location of		Amount of
Derivatives Designated as		Gain or (Loss)		Gain or (Loss)
Economic Hedges		Recognized in		Recognized in
and Other		Income on		Income on
Derivative Instruments		Derivatives		Derivatives
				Three Months Ended
				March 31,
				2010				2009
Commodity contracts		Cost of sales		$	(39	)		$	96
Foreign currency contracts		Cost of sales			(13	)			6
					(52	)			102
Alon earn-out agreement		Other income (expense)			–				11
Alon earn-out hedge (commodity contracts)		Other income (expense)			–				(15	)
					–				(4	)
Total				$	(52	)		$	98
		Location of		Amount of
		Gain or (Loss)		Gain or (Loss)
		Recognized in		Recognized in
Derivatives Designated as		Income on		Income on
Trading Activities		Derivatives		Derivatives
				Three Months Ended
				March 31,
				2010				2009
Commodity contracts		Cost of sales		$	(3	)		$	91
Total				$	(3	)		$	91